Measuring Portfolio Valuation

The goals of this paper are to discuss issues pertaining to the valuation of portfolios, mutual funds, and exchange traded funds (ETFs). The analysis presented here indicates that many commonly reported ETF and mutual fund PE ratios used by investment companies are highly misleading. The paper discusses correct and incorrect ways to measure the PE ratio of a portfolio of stocks. Statistical tests based on groups of firm PE ratios are shown to be misleading because PE ratios are undefined when earnings are negative and outliers when earnings are small. Tests based on the ratio of the difference of market cap and earnings to market cap are shown to be more informative than tests based on PE ratios.