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Chapter 5. Fundamental Volatility > Redefining Market Risk

Redefining Market Risk

We expand our insights into both market and investment value by redefining market risk so that trends in the stock price (technical trends) become valuable for quantifying trends in revenues and earnings (fundamental trends). Interpreting price information with this purpose in mind depends on how we first make price data reliable. If you incorporate price or other technical data into your analytical program, you need to be aware of several facets to price as you proceed:

  1. To the extent that price is based on reported financial information, it may be unreliable as a short-term indicator; the question is, How would the price be different if earnings were reported as core earnings?

  2. Short-term price change can be used to measure and compare market risk, but it is not reliable as a measurement of long-term investment value. This important point is agreed upon by proponents of both the Dow theory and the random-walk hypothesis.

  3. In measuring volatility using the usual price-related methods, the conclusion will be inaccurate if price aberrations outside of the longer term trading range are not excluded.


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