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Profitability, Growth, and Average Returns

Eugene F. Fama

University of Chicago - Finance

Kenneth R. French

Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)

July 2004

CRSP Working Paper No. 558

Valuation theory says that expected stock returns are related to three variables: the book-to-market equity ratio (B/M), expected profitability, and expected investment. Given B/M and expected profitability, higher rates of investment imply lower expected returns. But controlling for the other two variables, more profitable firms have higher expected returns, as do firms with higher B/M. These predictions are confirmed in our tests. Our results are qualitatively similar to earlier evidence, but in quantitative (economic) terms, there are some interesting surprises.

Number of Pages in PDF File: 41

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Date posted: July 30, 2004  

Suggested Citation

Fama, Eugene F. and French, Kenneth R., Profitability, Growth, and Average Returns (July 2004). CRSP Working Paper No. 558. Available at SSRN: https://ssrn.com/abstract=570343 or http://dx.doi.org/10.2139/ssrn.570343

Contact Information

Eugene F. Fama (Contact Author)
University of Chicago - Finance ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7282 (Phone)
773-702-9937 (Fax)

Chicago Booth School of Business Logo

Kenneth R. French
Tuck School of Business at Dartmouth ( email )
Hanover, NH 03755
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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