The Pros And Cons Of Growth Stocks

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b. The data shows that the three trend lines are generally correlated; however, the market risk premium has a greater range of returns. When the economy does poorly (dotcom bubble, 2008 recession) the market risk premium generates the worst returns. This makes sense considering it is a reflection of the overall market portfolio. Conversely, when the economy is strong the market risk premium generates higher returns than SMB and HML. Overall, HML and SMB outperform the market up until the recovery from the 2008 recession. After 2014 it is evident the market outperforms both SMB and HML. These trends indicate that SMB and HML are more stable investment strategies with lower upside. c. From 200701 – 200901 growth stocks outperformed value…show more content…
Value investing would be a good strategy for more aggressive investment groups who can tolerate the additional risk. Under normal conditions, the market portfolio would be a better option for more conservative investors. This data runs contrary to common beliefs because HML would have generated more stable returns than the market portfolio during this time frame. 2) According to Fama-French, value stocks outperform growth stocks in the long run. The patterns from the chart indicates that value stocks perform better when the broader market is in a bull-cycle (2003-2007) (2015-Present). There is also contrary evidence showing that growth stocks do better during some economic growth periods (2010-2012) (2014-2015). There are also mixed results when the broader economy is in decline. During the recession of the early 21st century (2002-2003) it seems that value stocks were a better bet than growth stocks; however, from 2007-2009 growth stocks outperformed value stocks amidst a recession. There are not enough data point to make an overarching conclusion about the advantage of growth or value stocks just from this chart. Since Fama-French studied market observations over a longer period of time and concluded that value stocks were better than growth stocks, I believe it would be wise to assume value stocks will continue to outperform in the future.

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