The performance of value and growth stocks has received considerable attention amongst finance academics and practitioners. The value strategy is one of the most popular investment strategies adopted by institutional and retail investors. Benjamin Graham is often credited as a pioneer for the value investment strategy. You are skeptical and are not sure whether the value strategy works in Australia. In this individual assignment, you would be tasked with writing a report on whether the value strategy can produce superior performance in Australia.
Professor Kenneth French is one of the authors in Fama and French's (1993) three-factor model that incorporates a value premium. Note that you will subsequentially learn about asset pricing models in Week 5 but in this assignment, you are not asked to evaluate asset pricing models. In Ken French’s data library, he has shared historical returns for various asset classes and portfolios, including the monthly portfolio returns based on four value metrics in the Excel File named ‘Value Strategies in Australia.xlsx’. Please download this Excel file from the Canvas – Assignment One page. There are two tabs in the file. The ‘Detail’ tab briefly explains the ‘Australia’ tab containing monthly portfolio returns.
Based on the Excel spreadsheet indicated above, perform the following tasks. You are encouraged to use Excel to perform the analyses. However, your analyses and discussion of findings must be presented as a report in a Word/PDF format. The word limit for the report is 1500 words excluding Executive Summary, Table of Contents, Tables, Figures, References, and Appendices.
- The four metrics given in the spreadsheet are book-to-market, earnings-to-price, cashflows- to-price, and dividend-to-price Stocks are categorized into high, low, and zero portfolios based on the four metrics. For example, high book-to-market portfolios contain stocks with a high level of book-to-market ratio. Discuss whether stocks with high, low, or zero levels, based on these metrics, are considered as value or growth stocks. (5 marks)
- Calculate the time-series average returns, standard deviations, and the reward to risk ratio to the various value and growth portfolios based on the four metrics. Over the sample period considered, do you think value or growth stocks tend to generate a higher return? (15 marks)
- Compare the performance of these value and growth portfolios with the market return over the same period. Do they outperform or underperform the market? (5 marks)
- Examine the time-series return pattern of these portfolios. Are there any specific periods in which value/growth strategies outperform or underperform? Based on the time-series return pattern, do you think market condition (e.g. boom or recession) plays a role in explaining the return variation between value and growth stocks? (15 marks)
- Conduct some literature review on the performance of the value strategies in the US, the largest capital market in the world. Is your finding consistent with the evidence from the US? (25 marks)
- Based on your findings, provide recommendations on whether an Australian investor should adopt value/growth investment strategies. (15 marks)
- Structure and presentation of the report including (10 marks)
- Writing style and (10 marks)
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