Value Vs Growth: A study of portfolio returns on the Stockholm Stock Exchange

Humans are by nature value and profit maximizers. In all we do, we implicitly calculate and compare the expected gains with the risks involved. That is, we try to maximize our profit with as low risk as possible.

Research Questions:• Will a portfolio based on value stocks, on a risk-adjusted basis, outperform a portfolio based on growth stocks on the Stockholm Stock Exchange?
• Is the superior strategy able to generate abnormal risk adjusted returns by beating the OMXS in-dex?
Purpose:The purpose is to investigate if an investor by purchasing a portfolio based on value stocks will outperform a portfolio based on growth stocks. Furthermore the authors aim to examine if the superior portfolio can beat the OMXS index and create abnormal returns on the Stockholm Stock Exchange.
Method:The quantitative research method is used when gathering information. To deter-mine which stocks to include each year between 1993 to 2005 the price-to-book ratio (P/B) is used. Based on this multiple the sample is divided into two extreme groups of low and high P/B companies. These two groups are further divided according to their price-to-earning ratios (P/E). This creates four portfolios, which symbolizes value and growth stocks. Each portfolio’s return is recorded annually during the 12 year period. The returns are risk-adjusted in order to find the superior portfolio. This portfolio is then compared with the OMXS index for the same period to find out whether it has created an abnormal return…


1 Introduction
1.1 Background
1.2 Problem Discussion
1.3 Purpose
1.4 Perspective
1.5 Delimitations
1.6 Definitions
1.7 Methodological Approach
1.8 Methodological Overview
1.9 Literature Study
1.10 Disposition
2 Theoretical Framework
2.1 Efficient Market Hypothesis (EMH)
2.2 Portfolio Theory
2.2.1 Return
2.2.2 Portfolio risk and the relation to portfolio performance
2.2.3 Risk definition
2.2.4 Risk-free rate
2.2.5 Portfolio performance in relation to the market benchmark
2.2.6 Market Index
2.2.7 Risk-adjusted measures
2.3 Previous Research of Valuation Multiples
2.4 Value and Growth Definitions
2.5 Examples of value and growth companies
3 Methodology
3.1 Quantitative research approach
3.2 Secondary data
3.3 Data collection and portfolio creation
3.3.1 Sample size
3.3.2 Break points for P/B
3.3.3 Systematic sampling
3.4 Portfolio Calculations
3.5 Portfolio Analysis
3.6 Reliability and Validity
4 Empirical Findings and Analysis
4.1 Empirical findings of the four portfolios
4.2 Portfolio comparison and analysis
4.2.1 Geometric average comparisons
4.2.2 Cumulative return comparisons
4.2.3 Reasons for return differences
4.3 Low-Low vs. OMXS index
5 Conclusion and Final Remarks
5.1 Conclusion
5.2 The authors’ reflections
5.2.1 Reasons for over- and under valuation
5.2.2 Reasons for abnormal return
5.2.3 Implications for the EMH
5.2.4 Side remarks on β, P/E and the time period used
5.3 Critique of method used
5.4 Suggestions for further studies

Author: Carlström, Anders,Karlström, Rikard,Sellgren, Jakob

Source: Jönköping University

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