Optimizing Value

18 Pages Posted: 8 May 2015 Last revised: 19 Aug 2015

See all articles by Ran Leshem

Ran Leshem

Aperio Group

Lisa R. Goldberg

University of California, Berkeley; Aperio Group

Alan Cummings

Aperio Group

Date Written: May 6, 2015

Abstract

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

Leshem, Ran and Goldberg, Lisa R. and Cummings, Alan, Optimizing Value (May 6, 2015). Journal of Portfolio Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2603308 or http://dx.doi.org/10.2139/ssrn.2603308

Ran Leshem

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

Lisa R. Goldberg (Contact Author)

University of California, Berkeley ( email )

Department of Statistics
367 Evans Hall
Berkeley, CA 94720-3860
United States

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

Alan Cummings

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

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