18 Pages Posted: 8 May 2015 Last revised: 19 Aug 2015
Date Written: May 6, 2015
We investigate how the choice of accounting metric and implementation affect the performance of a value strategy. We find that:
• Strategies based on book-to-price (B/P) and earnings-to-price (E/P) ratios delivered a positive premium over the 60-year horizon from 1951 to 2013.
• E/P had higher return and lower risk than B/P over the full horizon.
• However, B/P outperformed E/P between 1963 and 1990, and that was the basis of the landmark study establishing B/P as the academic standard.
• Strategies based on a blend of B/P and E/P outperformed both single-metric strategies during most 10-year periods between 1973 and 2013.
• Over the same horizon, optimized value strategies had lower tracking error, lower turnover, and a higher information ratio than “rank-and-chop” strategies, which weight high-percentile value stocks by capitalization.
• Sector constraints raised both the Sharpe ratio and the information ratio of an optimized blended-value strategy.
Keywords: Value, book-to-price, earnings-to-price, blended value strategy, optimized strategy, rank-and-chop strategy, sector constraint, tracking error, turnover
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation