Risk factors and their relationship with different macroeconomic environments are well understood. But in recent years these factors have not behaved as expected.
This is the case for value stocks. Buying cheap stocks in the expectation of their prices improving over the long term is a well-established strategy. Investors select value stocks according to specific financial metrics, such as low price-to-book ratios or price-to-earnings ratios.
These discounted stocks tend to be higher risk companies, often with high levels of debt. Over time, however, investors expect to be rewarded for investing in these higher risk companies with greater potential returns than would be achieved by investing in the overall market.
This stock characteristic has been heavily researched by academics. But despite its well-established credentials, this strategy will sometimes experience unexpected behaviour.
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