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?

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BlackTom AI · Accepted Answer

The question describes an investor building a portfolio by going long on stocks with high book-to-market ratios and short on stocks with low book-to-market ratios.
First, recall what book-to-market (B/M) ratio represents: a high B/M indicates value characteristics, meaning the stock may be undervalued relative to its accounting value. Conversely, a low B/M suggests growth characteristics, where investors pay more for expected growth.
Next, consider the position construction: buying (going long) stocks with high B/M and selling (shorting) stocks with low B/M creates a tilt toward value stocks while selling the expensive, growth-oriented stocks. This pattern is characteristic of value investing, which seeks to exploit mispricings by favoring assets with low valuations relative to fundamentals and avoiding overvalued growth stocks.
Regarding the missing answer options, the data provided does not list alternative styles (e.g., growth investing, momentum, quality, or market-neutral strategies). Nevertheless, the described approach aligns with a classic value investing style because it emphasizes purchasing undervalued equity assets (high B/M) and shorting overvalued or relatively expensive growth candidates (low B/M).
One could contrast this with other styles: growth investing would typically emphasize high B/M stocks vs low B/M, or a style that focuses on momentum would rely on recent price trends rather than fundamental valuation ratios. Since the question specifies the high B/M/long and low B/M/short combination, those contrasts help clarify why the intended style is value investing.

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?

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