During the past 35 years, value investors have generally outperformed growth investors. The persistent performance advantage of value stocks over growth stocks can arise either because of fundamental risk differences between the styles or as a result of the mispricing of value stocks. The authors provide evidence that a stock’s expected return is determined more by its characteristics than by its return pattern. After controlling for stock characteristics, the authors find that factor sensitivities provide no information about a stock’s expected rate of return. This evidence tends to support the mispricing, rather than the risk-based, explanation of the return premium associated with value stocks.
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Daniel et al. (1998) studied this question.