1. The document analyzes value and growth stocks between 1975-2004, comparing their returns and risks. It finds that value stocks generally outperformed growth stocks over this period. 2. A moving average analysis of the value-growth return spread shows it fluctuated between positive and negative returns with no clear pattern, contradicting the theory that value stocks always outperform. The spreads were also small relative to the portfolios' volatility. 3. Regression analyses found the CAPM model did not accurately predict returns. The growth portfolio underperformed predictions by -0.15% annually, while the value portfolio outperformed by 0.14%, contradicting CAPM. The spread portfolio had low correlation to the market, as

1. 1
CASE 2A / LISTED EQUITY
Maastricht University
School of Business & Economics
Place & date: September 13, 2017
Name, initials: Hodjeff, TCB ,
Busch, RS,
Hüttenrauch, N,
Falchetti, EF
Fassmer, SJ
For assessor only
ID number: I6112082, I6112235,
I6112390, I6112826,
I6170814
1. Content
Tutorial group number 10 2. Language structure
Course code: EBC2054 3. Language accuracy
Sub-group number: 2 4. Language: Format & citing/referencing
Writing tutor name: Juan Overall:
Writing assignment: 2A Advisory grade
Assessor’s initials
Your UM email address: t.tatiana@student.maastrichtuniversity.nl ;
r.busch@student.maastrichtuniversity.nl ;
e.falchetti@student.maastrichtuniversity.nl; s.fassmer@student.maastrichtuniversity.nl

2. Introduction. The Capital Asset Pricing Model (CAPM) lies at the foundation of evaluating
the performance of managed portfolios. However, not too long ago, the scholars Fama and
French have questioned the real world application of the CAPM theorem and its ability to
explain stock returns and value premium effects (Bodie, Kane, & Marcus, 2017). Fama and
French observed that value stocks outperform growth stocks in most cases (Fama & French,
1989). However, there has been an ongoing battle between growth and value investing.
Growth investing entails looking for companies that have a potential to grow faster than
others. Value investors, on the other hand, look for stocks they believe are undervalued by the
market. These stocks have a low price-to-earnings ratio and high dividend yields. By
comparison, growth investors invest in companies expecting to yield an above-average rate of
growth compared to the overall market (Bodie, Kane, & Marcus, 2017).When considering
growth or value stocks, one should take into consideration the cycle that the market happens
to be in. Value stocks may do well early in an economic recovery but are typically more
likely to lag in a sustained bull market. By comparison, growth stocks will outperform during
periods of expansion (Bodie, Kane, & Marcus, 2017). The aim of this case is to analyze if
there is a value/growth abnormity. For this purpose, we will compare value and growth stocks
as well as their spread in the period between 1975 and 2004.
First, we will describe the summary statistics. Second, we will elaborate on the question if
spread return is consistent over time. Third, we will run a regression and discuss the
outcoming alphas and betas regarding statistical significance and its economic interpretation.
In the end, we will give a short conclusion about our findings and report on the profitability
of a Value/Growth Strategy.
Question 1
The summary statistics of the growth, value and spread portfolios are benchmarked against
the S&P500, which resembles the efficient market portfolio. The mean excess return of the
S&P500 is 14,89 percent. Growth stocks and value stocks yield an excess return of 13,87 and
15,71 respectively. Whereas the spread portfolio generated an excess return of 1.63 percent.
Overall, the value stock portfolio has the highest return. The standard deviation of the
S&P500 is 15,32 percent away from the mean. In comparison, growth stocks are even further
away with a standard deviation of 16,81, whereas value stocks are less volatile, with a
standard deviation of 14,9. Normally, the expectation for value stocks would be to be more

3. volatile than the S&P500 since the expected return is higher for them. As a result, the value
portfolio clearly outperforms the S&P500. Vice-versa, the growth stocks portfolio is the
worst if compared to S&P500 and value stocks portfolio.
In each of the four cases analyzed the total amount of positive returns outnumbers the total
amount of negative returns (in percentage). It can be noted that the percentage of positive
returns of value stocks 64,23 is slightly higher than the percentage of positive returns of both
S&P500 (61,97) and growth stocks (60,00). The correlation table shows that the growth and
value portfolios are highly related to the S&P500 (0,95 & 0,97) which is because many of
the S&P500 firms are included in the two portfolios. Growth and value portfolios are also
highly related to each other (0,85). In contrast, the S&P500 has a negative correlation (-0,23)
with the spread portfolio.
Question 2
To identify whether there is any consistency in the return of the value-growth spread, the
moving average technique is applied. Essentially, this technique is used to smooth out for
heavy fluctuations to sense any trends and patterns in a data set. In our case, a 12-month
interval is used to calculate the moving average (see appendix B).
Looking at the trendline, the moving average does not show any consistent pattern: About
half of the time, the numbers are in the positive range and vice-versa. The sharp fluctuations
of negative and positive values appear to contradict the theory that value stocks generate
higher returns than growth stocks. If the hypothesis was correct, we would solely observe
positive spread values that are in the positive range. Another aspect to focus on are the size of
the spreads. The spreads recorded, considerably small compared to the volatility of the value
or growth portfolio. This indicates that the growth and value stocks are correlated. If they
were to move together, the spread would be small and merely be fluctuating around zero.
- please insert graph 1 about here -
Question 3
The capital asset pricing model describes the relationship between expected return and
systematic risk for assets. Investors that take on additional risks need to be compensated with
higher returns. Therefore, the returns for the growth, value and spread portfolio should be
greater than the market portfolio. These returns should be correctly predicted by the capital
asset pricing model, based on the market portfolio. Thus there should be no evidence of any
alphas in the market. Nonetheless, should the market portfolio be the most efficient portfolio
regarding risk and return, since all idiocratic risk is diversified away.

4. Fama and French found evidence that a multifactor model, with more than one predictor,
results in more realistic and precise predicted returns. The theory points out that stocks with a
high book to market ratio outperform growth stocks. Value stocks tend to have their capital
invested into assets, which makes these stocks more volatile. Especially during economic
stress period, since capital assets, like machinery, are not considered to be liquid assets.
This elaboration will, therefore, focus on the question whether the CAPM model was able to
predict the value, growth and spread returns correctly. The excess returns are adjusted for the
risk-free rate and are statistically analyzed using the linear regression model.
3.1 Growth Portfolio The first regression output tests the relationship between the market
and growth portfolio. In the case that the CAPM holds, the predicted alpha should be zero,
statistically insignificant or both. The efficient market hypothesis points out that stocks are
always fairly priced. The output shows that 94 percent of the dependent value variation can
be explained by the model. This gives already evidence that the correlation, the beta, between
the market and growth portfolio should be close to unit parity. The low value of the sum of
squares residuals compared to the sum of squares total is unusually high, considering that the
regression is based on real market returns. The whole test, however, is significant at an even a
1% confidence level, making it representative of the entire population. The values of high
interest are the intercept and the slope of the line of best fit. The intersect is predicted by the
capital asset pricing model to be in the origin. The regression analysis, however, shows that
the growth portfolio consistently underperforms the market portfolio by -0,15%, hence
showing a negative intersect (alpha). The alternative hypothesis can be rejected at a 5%
confidence level, making the alpha statistically significant for the analysis. This finding is not
aligned with the theory of the capital asset pricing model. The additional risk that an investor
is holding in the growth portfolio is not fairly compensated by a higher return. The slope of
the regression model, the beta, is 1,06 and statistically relevant at a 5% confidence level. The
growth portfolio is therefore in align with the market portfolio. - please insert table 2 about
here -
3.2 Value Portfolio The second regression tests the relationship between the value portfolio
and the market portfolio. The adjusted R² describes 91% of the dependent variable variation
in this model, which is slightly lower than in the growth portfolio. The test is significant at a
1% confidence level, making it statistically representative. The output results with a positive

5. alpha of 0,14%, meaning that the value portfolio consistently outperforms the market
portfolio. This implies that investors would be better off by holding the value portfolio
instead of the market portfolio. This is also supported by the significance of the alpha, at a
5% significance level. This result profoundly contradicts the CAPM, since the market
portfolio seems not to provide the best returns relative to the risk level. The slope of the
regression line is 0,93 and significant at 1% confidence level. That means that the value
portfolio is less affected by the market and therefore shows a lower level of systematic risk. -
please insert table 3 about here-
3.3 The Spread Portfolio The spread portfolio intents to gain returns from the relative
difference between the value and growth portfolio. Fama and French point out that value
stocks consistently outperform the growth stocks. In the case that this theory holds, then the
spread portfolio would give reasonable returns at a relatively low level of risk. Since the
differences in the returns are crucial, the r square is expected to be significantly lower
correlated to the market portfolio. The regression output shows that only 5% of the dependent
variable variation can be explained by the model. The resulting alpha and beta are the
differences from the two regressions above. The alpha should be equal to 0,15+0,14=0,29,
which fits the results from the spread regression summary output. Hence, the resulting alpha
is positive and significant at a 5% confidence level. This result also contradicts the CAPM,
and investors would be better off, by holding the spread portfolio instead of the market
portfolio. The alpha is also larger compared to the value portfolio because of the absolute
difference in the returns of the value and growth portfolio the point of interest. Investors that
hold the spread portfolio get returns at a significantly lower level of systematic risk. The beta
is in this case -0,13, which means that the spread portfolio is negatively correlated to the
market portfolio. The beta is also significant at even a 1% confidence level. - please insert
table 4 about here -
Summarized do the results contradict the theory of the CAPM. All three portfolios show
some form of statistically relevant evidence for the existences of alphas. Hence, the efficient
market hypothesis either does not hold, or the CAPM pricing based on the market portfolio is
not legitimate. This can certainly be the crucial problem in this analysis. The market portfolio
is assumed to be the S&P500, however, does the true market portfolio consist of all assets,
hence the S&P500 index accounts only a fraction of the true market portfolio. Nonetheless is
that index a reasonable approach to estimate the market portfolio, regarding total equity. The
efficient market hypothesis argues that theoretically, there should be no evidence of any

6. alphas considering that investors would sell their growth stocks and purchase value stocks.
This will cause the prices to change and thus adjust the returns so that both portfolios
ultimately result in zero alphas. This, however, will be further analyzed in section 3.4. The
results imply that investors would, therefore, be better off by holding the value or spread
portfolio.
3.4 Further Analysis To further explore the alphas of all three portfolios, different time
spawns were analyzed. The years are divided up into five-year intervals that were separately
analyzed regarding their magnitude and significance. The graph below shows the
development of these alphas: - please insert graph 2 about here -
The growth portfolio seems to consistently underperform the market portfolio. Particularly
during the first two periods, during 1995-1985. After that, the negative alpha lost in
magnitude and approached the x-aches. The value portfolio on the other hand consistently
outperforms the market portfolio. The development of the alpha of the value portfolio is
nearly in perfect negative parity to the alpha of the growth portfolio. Hence investors should
have allocated their money from the growth to the value portfolio to gain from positive alpha
returns. The spread portfolio alpha is the absolute difference in the alphas of the growth and
value portfolio. Nonetheless is to remark that the significances of these alphas vary over time.
After 1985 the alphas are no longer statistically significant at even a 20% confidence level,
only the alphas between 1975-1985 were significant, that goes for all the portfolios. Hence it
would not be correct to assess that the value stocks consistently outperform the growth stocks
since not all alphas are statistically significant. It could be due to the fact, that in the earlier
years this abnormally, of non zero alphas, was evident. However did the markets changed
drastically over time and thus became more efficient (Fama, 1998). The increase in efficiency
through electronic trading and more market participants caused the alphas to adjust
accordingly. This would then support the efficient market hypothesis.
Conclusion
In conclusion it can be said, that … beginning part …
There is certainly evidence for alphas in the market between 1975 and 2004. All three
regression models showed statistically significant results for the alphas. Hence investors
could profitably exploit the markets by holding the value or spread portfolio, instead of the
growth portfolio. Nonetheless, does this not reflect the full picture, since the significances of
the alphas decreased over time, causing them to be no longer representative of the whole

7. population. Therefore can be said that investors could have profitably outperformed the
market portfolio by holding the value or spread portfolio. However, after 1985, the
value/growth strategy was no longer more profitable than the market portfolio. Increasing
competition on the stock market and further development made the market more efficient and
hence caused the end for the value/growth strategy.

8. Appendices
Appendix A: A Summary Statistics and Correlation Matrix
Appendix B: The Moving Average

10. :
Table 2
Table 3
Table 4

11. Graph 1
Graph 2
References
Bodie, Kane, & Marcus. (2017). Essentials of Investment (10th ed.).
Fama (1998), Market efficiency, long-term returns, and behavioral finance (Volume 49)

12. Fama, E., & French, K. (1989, August). Business conditions and expected returns on stocks
and bonds. Retrieved September 14, 2017, from
http://www.sciencedirect.com/science/article/pii/0304405X89900950?via%3Dihub