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Value Stock Versus Growth Stock
Finance & Accounting
Pages 6 (1506 words)
Name Date Value Stocks Versus Growth Stock 1) Fama and French define value stocks as undervalued stocks which are under priced. These stocks have high ratio of book value to market value. Similarly growth stocks are defined as those stocks which are considered by the market as blue chip stocks and are trading at a high price because of high demand for these stocks in the market.
In real world, there are more risks involved than just one of type of risk. Market sensitivity is an important risk but that cannot alone be used in order to compute the intrinsic value of stocks and hence by relying on only this type of risk, we are actually making the things more simple than they really are and not accounting for important risk elements which lead to faulty analysis and intrinsic value determination of stocks. This can lead to poor decision making and by relying just on Capital Asset Pricing model, investors stand a chance of losing their hard earned money because they are not account for all types of risk that should be included in their investment. All of this debate shows that investors should not just pick the blue chip stock but also first try to classify stocks into value or growth stocks and then create a portfolio on the basis of a strategy called “Dogs of the Dow” and keep on making structural changes to their portfolios based on the results announce. This way they are not only diversifying, but also upgrading the return on their investments. 2) There are several factors that account for Risk and Returns according French and Fama. Risks are basically of three types. The first type of risk is beta or market volatility. ...
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