Expected Return and the Value Premium

26 Pages Posted: 14 May 2007 Last revised: 25 Aug 2008

See all articles by Hollister B. Sykes

Hollister B. Sykes

New York University (NYU) - Berkley Center for Entrepreneurial Studies

Date Written: December 1, 2007


Empirical research has shown that within a cross-section of stocks, investor return increases with book-to-market ratio. The reason is in dispute. One side argues that the market is inefficient; the other, that value stocks are riskier. Statistical analysis of historical data has not resolved the issue. We take a theoretical approach, which suggests that the higher returns for value stocks can be explained without the introduction of risk. Our theory leads to an equation for expected return, which differs from realized return through elimination of a speculative noise factor. The theory defines fundamental factors that determine investor return, and is confirmed by empirical correlations reported by others.

Keywords: Growth Stocks, Value Stocks, Stock Screens, Value Premium, Expected Return, Efficient Markets, Book-to-Market, Share Repurchase, Risk Factors, Valuation, Dividend Payout, Factors Affecting Return, Investor Behavior, Investment Policy, Dividend Policy, Share Buy-back, noise factor

JEL Classification: C20, G12, G30, G31

Suggested Citation

Sykes, Hollister B., Expected Return and the Value Premium (December 1, 2007). Available at SSRN: https://ssrn.com/abstract=985983 or http://dx.doi.org/10.2139/ssrn.985983

Hollister B. Sykes (Contact Author)

New York University (NYU) - Berkley Center for Entrepreneurial Studies ( email )

Henry Kaufman Management Center
44 West 4th Street
New York, NY 10012
United States

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