Abstract:Empirical research has shown that within a cross-section of stocks, investor return increases with book-to-market ratio. The reason is in dispute. One side argues that the market is inefficient; the o...Empirical research has shown that within a cross-section of stocks, investor return increases with book-to-market ratio. The reason is in dispute. One side argues that the market is inefficient; the other, that value stocks are riskier. Statistical analysis of historical data has not resolved the issue. We take a theoretical approach, which suggests that the higher returns for value stocks can be explained without the introduction of risk. Our theory leads to an equation for expected return, which differs from realized return through elimination of a speculative noise factor. The theory defines fundamental factors that determine investor return, and is confirmed by empirical correlations reported by others.Read More
Publication Year: 2007
Publication Date: 2007-01-01
Language: en
Type: article
Indexed In: ['crossref']
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