Value and growth stocks on the Swedish stock market

Mikael Stråhle

Student thesis: Master thesis


This study investigates whether an investor can get superior returns when investing in value stocks (cheap stocks neglected by the market with a bad performance record) compared to investing in growth stocks (popular stocks with a good performance record) on the Stockholm stock exchange (1989-2010). The classification of value and growth stocks is governed by financial ratios. In this study stocks with low price to earnings ratio, price to cash flow ratio, market to book value ratio and price earnings growth ratio are considered to be value stocks. Conversely, stock that score high on the aforementioned ratios are considered to be growth stocks. The stocks were sorted into different portfolios that consisted of only value stocks and only growth stocks. Holding periods for the portfolios looked at were 6, 12, 36 and 60 months. The absolute returns and risk-adjusted returns for portfolios composed of value stocks and portfolios composed of growth stocks were compared. On average, the value portfolios had higher returns (also risk-adjusted returns) for all holding periods and all variables (except for the price earnings growth ratio where the opposite was true). This was also the case when comparisons were made over market boom and bust periods. Notably is that the betas were often lower for the value portfolios than for the growth portfolios. This phenomenon of higher returns without higher risk is not necessarily contradicted by standard financial theories such as Efficient Market Hypothesis or the Capital Asset Pricing Model due to not all risk being reflected in beta. Furthermore, other explanations of why this so called value premium exists can be found in the field of behavioural finance where the irrationality of investors is taken into account (or the rationality of following the other irrational investors). The conclusion is that an investor can get higher returns by investing in value stocks compared to growth stocks on the Stockholm stock exchange, even when the returns are risk-adjusted.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2011
Number of pages84