Question

Describe the value premium puzzle and explain why it might be inconsistent with the Capital Asset Pricing Model.

Answer 1

Answer

In economic the value premium in investing a risk greater risk adjusted return for the particular kind of value stock over the growth stock.It is based on the measure of HML or also known as high book to market ratio - low book to market ratio for the particular measurment of equity return which is based on evaluation.The value premium puzzle ( VPP) is based on the empirical and experienced observations and which is not explained by the capital asset pricing model ( CAPM) , that the differences in the low average excess returns and the high excess return ( average ) of the stocks in growth .The variation of excess return can not be observed by the Capital asset pricing model betas and cannot be accounted by it . This is the difference of the return and the 3 month bill of treasury across the portfolios of book-to-market.In Capital asset pricing model ,the gap or the differences in the return of two assets are only because of differences in thier betas. So , it is ameasure of that the market portfolios return with particular asset commove of the return .

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