Portfolio Design: A Modern Approach to Asset Allocation

VALUE AND GROWTH INDEXES FOR EARLIER PERIODS

Stock market data collected by the University of Chicago’s CRSP data set are available back through 1926. These market data form the basis for the SBBI data set of large and small cap stock returns. To develop value and growth indexes, however, it’s necessary to obtain the book value of common equity from the balance sheets of the firms being studied. The Compustat data set provides this information, but this data set does not have book value data prior to 1963 (and is in any case biased by overweighting larger firms).6

Fama and French have developed indexes for value and growth extending all the way back to 1926. The division between small-cap and large-cap stocks is based on stocks in the NYSE only even though the indexes include stocks from the AMEX and NASDAQ (the latter after 1972). The median stock in the NYSE by size is used to split stocks into the two size categories. To extend value and growth indexes back prior to 1963, Fama and French use hand-collected data on book value to rank firms by their book-to-market ratios. Unlike the Russell indexes, therefore, the Fama-French indexes are based only on book value-to-market data. The results reported below are for the indexes defined using the 30 percent of firms with the highest book-to-market ratios as the value firms and the 30 percent of firms with the lowest book-to-market ratios as the growth firms. (The remaining 40 percent of the firms with median book-to-market ratios are ...