Portfolio Design: A Modern Approach to Asset Allocation

SUMMARY—KEY FEATURES OF GROWTH AND VALUE STOCKS

This chapter has provided a wide range of evidence on the long-run performance of growth and value stocks. The evidence is based on the Russell and S&P 500 indexes for the recent period and the Fama-French indexes for the earlier periods.

The long-run performance of large-cap value stocks is quite impressive. In all of the data sets reported, value stocks give higher average returns than growth stocks. In the more recent period covered by the Russell and S&P indexes, value stocks have lower standard deviations than growth stocks. So the risk-adjusted performance of value stocks, as measured by Sharpe ratios, is clearly superior to that of growth stocks. Because of the high correlation between growth and value stocks, moreover, the superiority of value stocks is also found in a portfolio context. The beta for value stocks is below one, while that of growth exceeds one. The alpha for value, moreover, is positive and the alpha for growth negative. In the earlier period covered by the Fama-French data, value also outperforms growth. In this earlier period, value has a higher standard deviation than growth, but its risk-adjusted performance is still superior. There is no doubt that there is a value premium in the U.S. stock market.

NOTES

1. Eugene F. Fama and Kenneth R. French (1992) and (1993).

2. The capitalization figures are for June 2009 and are taken from the web site, www.russell.com.

3. See the discussion in Chapter 1.

4. The S&P/Barra ...