Stock Return and Fundamental Variables: A Discriminant Analysis Approach

This paper presents a method of stock selection and evaluation based on discriminant analysis. For this purpose, we investigate the cross-sectional relation between fundamental and financial variables, besides the CAPM beta coefficient, and the average stock returns. We examine stocks traded on Sao Paulo Stock Exchange (BM&FBovespa) during the period January 2006 to December 2010. The results were quite satisfactory, as the discriminatory predictive capacity obtained a level of success of 70 % in 2006, 73.08 % in 2007, 88.24 % in 2008, 78.57 % in 2009, and 70.59 % in 2010. We also concluded that the beta coefficient has discriminatory capabilities