werepresentedfortheP/Eregressioncontinuetoapply.The
independent variables continue to be correlated with each
other,andtherelationshipisbothunstableandlikelytobe
nonlinear.Infact,Figure8.12,whichprovidesascatterplot
of PEG ratiosagainst growth rates, for all U.S. stocks in
January 2006, indicates the degree of nonlinearity.
FIGURE 8.12PEG Ratios versus Expected Growth Rates
In running the regression, especially when the sample
containsfirmswithverydifferentlevelsofgrowth,weshould
transform the growth rate to make the relationship more
linear.AscatterplotofPEGratiosagainstthenaturallogof
theexpectedgrowthrateinFigure8.13,forinstance,yieldsa
much more linear relationship.