Kirstin Kruse, a portfolio manager, has an important client who wants to alter the composition of her equity portfolio, which is currently a diversified portfolio of 60 global common stocks. The client wants a portfolio that meets the following criteria:

Stocks must be in the Dow Jones Industrial Average, Transportation Average, or Utilities Average.

Stocks must have a dividend yield of at least 5.0 percent.

Stocks must have a P/E no greater than 20

Stocks must have a total market capitalization of at least $2.0 billion.

The table below shows how many stocks satisfied each screen, which was run in November 2001.

Number

Screen Satisfying

In Dow Jones Industrial Average, Transportation 65

Average, or Utilities Average Dividend yield of at least 5.0% 10

P/E less than 20 27

Total market cap of at least $2.0 billion 52

Satisfies all four screens 6

Other facts are:

In total, there are 65 stocks in these three indexes (30 in the Industrial Average, 20 in the Transportation Average, and 15 in the Utilities Average).

The stocks meeting all four screens were Southern Co. (utility), TXU Corporation (utility), Eastman Kodak Co. (consumer goods), Public Service Enterprise Group (utility), Reliant Energy (utility), and Consolidated Edison (utility).

A. Which valuation indicator or fundamental in Kruses screen is most restrictive?

B. Critique the construction of the screen.

C. Do these screens identify an appropriate replacement portfolio for the client?