Lecture 7

Question 1

Value premium

Answer 1

Value stocks (high B/M, E/P or C/P) tend to outperform growth stocks (low B/M, E/P or C/P)

Growth stocks are more glamorous (overvaluation)

Risk of distress: Value stocks tend to have persistently low earnings

Value trap: Price does not go down, bc. it is undervalued, but also does not go up (Deutsche bank)

Question 2

Quality investing

Answer 2

Portfolio can have both: Value + growth

Indicators of quality: market positioning, business model, corporate governance, financial strength

Question 3

Market cap investing

Answer 3

small cap firms for potential better returns

large cap for risk averse investors

Question 4

Style related question

Answer 4

Active vs passive
investment horizon
diversification across styles/asset classes
foreign versus domestic 
risk tolerance
top down/bottom up

Question 5

Benchmarking: Low volatility anomaly

Answer 5

High Beta, high volatility have underperformed low beta, low volatility than CAPM predicts

Not fully rational market participants + fixed benchmark mandates

Leverage constraints