Question

The results of the Fama and French study revealed that holding a portfolio of 200 of the highest (lowest) Book-to-market (Price-to-book) stocks over the period 1963-1990 yielded an average return that was nearly 3 times that of a portfolio with consistently the lowest (highest) B/M (P/B) stocks and also showed these “value” stocks had the lower betas.

a. Briefly explain the two (2) sets of rationale for building a deep value portfolio . Bullets!

b. List four (4) factors/explanations for the high returns to the deep value stocks in the F&F study Bullets

Answer 1

Answer a:

The two sets of rationale as per the fama-french study are:

• High value companies tend to outperform the market - i.e. high book-to-market value stocks will always get better returns in the long term;
• Small-cap companies tend to outperform the market;

Answer B:

The factors are:

• Size of firms;
• Book-to-market values;
• excess return on the market;
• quality
• momentum
• low volatility

you can use any four for your answers;