Research has shown in the past that high B/M stocks generally have higher average returns than...

Research has shown in the past that high B/M stocks generally have higher average returns than low B/M stocks over long periods of time. Explain how efficient market hypothesis and behavioral finance would differ in their explanations of this phenomenon.

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Expert Solution

According to efficient market hypothesis below is the explanation:-

High B/M stock called value stocks are usually from well established companies- thus offers lower level of risk and volatility comparatively - thus they also usually gives dividends - hence would lead to higher avg returns than low B/W stock (growth stocks)
Even if adverse news affects the Value stocks it wont be for longer time

According to the behavioral finance below is the explanation:-

Investor’s risk tolerance, investment objective and time horizon will matter a lot ,
Growth stock if considered to be undervalued generally comes from fundamental stock analysis whereas Value stocks depending upon the financial ratio or benchmark that it is being compared to
Thus even in this scenario High B/M stock called value stocks are usually from well established companies-their financials will be solid depicting higher avg returns as compared to growth stocks

jeff jeffy answered 6 months ago

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