“Growth” and “value” can be defined in several ways, but “growth” usually conveys the idea of a portfolio emphasizing or including only issues believed to possess above average future rates of per share earnings growth. Low current yield, high price to book ratios, and high price to earnings ratios are typical characteristics of such portfolios.
“Value” usually conveys the idea of portfolios emphasizing or including only issues currently showing low price to book ratios, low price to earnings ratios, above average levels of dividend yield, and market prices believed to be below the issues’ intrinsic values.
a. Identify and explain three reasons why, over an extended period of time, value stock investing might outperform growth stock investing.
b. Explain why the outcome suggested in part (a) above should not be possible in a market widely regarded as being highly efficient.