Book-to-Market Value Investing: Portfolio Construction and Risks
Article Quantpedia
Summary
The document explains the book-to-market factor, which ranks stocks by book value relative to market price. Its basic long-short construction buys stocks with high book-to-market ratios and sells those with low ratios; the described example uses NYSE, AMEX, and NASDAQ stocks, equal weights, and monthly rebalancing. A long-only version holds the high-ratio stocks without shorting the low-ratio group. The page also outlines the factor’s history and points to research examining its returns and implementation.
Key ideas
- A high book-to-market ratio is used as a measure of relative value in stocks.
- A standard HML portfolio buys high book-to-market stocks and shorts low book-to-market stocks.
- The described portfolio averages small-stock and large-stock HML portfolios and rebalances monthly.
- Long-only value portfolios retain equity-market exposure and are not reliable hedges against market declines.
- Possible explanations for the value premium include investor mispricing and compensation for distress or other risks.
- The document notes that value results depend on factor definitions, liquidity conditions, and measurement choices.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.