Suppose there is a stock (Stock A) and an index (Index A).
Stock A's price=$150
Index A's level=2450
The current ratio of Stock A/Index A Level = 150/2450 = 0.06122
Now supposing you look on the historic ratio chart and think that the ratio will increase from the current 0.06122 to say 0.07500 (ie you think stock A will outperform the index).
Just from knowing the expected ratio (0.07500) and the current ratio level (0.06122), would it be possible to calculate by how much % stock A outperformed the index by ?
Thanks a lot for all your help.
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Suppose that the stock is originally valued at $ and increases by %; and the index, valued at $ , increases by %. Then the values will increase by factors of and respectively. The ratio of the new values will then beSo if the original ratio, , was , and the new one is , we have
Re-arranging this equation gives:
which will give the value of for a given value of , enabling a comparison to be made. For example:
If (i.e. the index does not rise, ; i.e the stock rises by %.Grandad
If (i.e. the index rises by %), ; the stock rises by %, outperforming the index by %.
... and so on.