Portfolio Design: A Modern Approach to Asset Allocation

RELATIVE PERFORMANCE OF GROWTH AND VALUE INDEXES

The relative performance of these two indexes might be measured in three different ways:

1. Average returns

2. Returns adjusted for risk using standard deviations

3. Returns adjusted for systematic risk using beta

It would be normal for the index with the higher average return to also have the higher risk. The last two measures help us to assess whether the higher return is offset with higher risk.

Table 4.3 presents summary statistics for the Russell 1000 indexes over the period from 1979, when the Russell indexes begin, through 2009. The Russell 1000 value index gives a substantially higher average return than the growth index over this period. This is true whether geometric (compound) averages or arithmetic averages are used. Table 4.3 also reports the (annualized) standard deviations for the two asset classes. The standard deviation for large-cap growth stocks, 17.8 percent, is much larger than that for large-cap value stocks, 14.9 percent. Normally, an asset with higher risk would be expected to have a higher return to compensate for that risk. This is not the case for growth stocks, at least over this sample period of the last 31 years. With the average return lower for growth stocks, there is no compensation at all for the higher risk of this asset class.

TABLE 4.3 Returns for Russell 1000 Growth and Value Stocks, 1979–2009

Data Source: Russell® .

To be more precise about the extent to which higher risk is compensated with ...