Feb 18
Fama & French – Value Risk Factor
Sculpture on Main Sacred Way to Ming Tombs
Fama-French’s value risk factor is at the heart of their paper, in my opinion. The FF study demonstrates that value stocks have had higher returns than the broad market. Value is determined in the FF study by the Price/Book ratio. Cheap stocks outperform expensive stocks, and by cheap we mean stocks with a low P/B ratio.
Ferri writes, “Like the size factor the value factor cannot be diversified away by adding more value stocks; hence, value has its own unique risk factor.”
Once more, to enhance the performance of the portfolio, increase the percentage of stocks in the mid and small value asset classes. The data I have going back to 1989 supports this thesis.
Physlab