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

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?

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