An investor constructs a portfolio by going long on stocks with high book-to-market ratios and short on stocks with low book-to-market ratios. What style of investing is this?

Question

BlackTom AI · Accepted Answer

Question restatement: An investor constructs a portfolio by going long on stocks with high book-to-market ratios and short on stocks with low book-to-market ratios. What style of investing is this?

Option 1: Market Beta. This choice refers to exposures to overall market risk (systematic risk) and is not specifically about picking stocks based on their value signals like book-to-market. A market beta style would focus on sensitivity to market movements rather than a valuation stance, so this does not capture the high vs low book-to-market screening.

Option 2: Momentum. Momentum investing concentrates on stocks that have performed well recently (or over a defined past horizon) and tends to involve buying winners and selling losers based on price trends. The described approach uses fundamental valuation (book-to-market) rather than recent price momentum, so this option mischaracterizes the strategy.

Option 3: Growth. Growth investing emphasizes companies with high expected earnings growth and typically favors stocks with high valuations or strong growth prospects. The strategy in question, however, emphasizes book-to-market disparities rather than growth prospects, so this option does not fit well.

Option 4: Value. This choice aligns with the described approach: going long on high book-to-market stocks and short on low book-to-market stocks corresponds to a value (or value-investing) stance, which seeks underpriced equities relative to fundamental measures like book value. The use of book-to-market as the primary screen is a classic hallmark of value investing, and the long/short construct reflects a bet on the valuation gap.

Additional clarification: High book-to-market stocks are those that the market prices cheaply relative to accounting value, often viewed as value opportunities, while low book-to-market stocks are typically viewed as growth or overvalued by some measures. A long-short positioning amplifies this valuation tilt, characteristic of a value-oriented strategy.

In summary, among the given options, the described method is best characterized as a value investing approach, with the long/short implementation focusing on valuation signals derived from book-to-market ratios.

BU.232.640.W5.SP25 Quiz 3

An investor constructs a portfolio by going long on stocks with high book-to-market ratios and short on stocks with low book-to-market ratios. What style of investing is this?

View Explanation

Log in for full answers

Similar Questions

Which of the following screens would not be used by a value-orientated investor?

An investor constructs a portfolio by going long on stocks with high book-to-market ratios and short on stocks with low book-to-market ratios. What style of investing is this?

An investor constructs a portfolio by going long on stocks with high book-to-market ratios and short on stocks with low book-to-market ratios. What style of investing is this?

In a consumer society, many adults channel creativity into buying things

Economic stress and unpredictable times have resulted in a booming industry for self-help products

People born without creativity never can develop it

A product has a selling price of $20, a contribution margin ratio of 40% and fixed cost of $120,000. To make a profit of $30,000. The number of units that must be sold is: Type the number without $ and a comma. Eg: 20000

Which of the following statement regarding cost is correct:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler