Is Style a Key Determinant of Investment Returns?
There have been numerous empirical studies that indicate that investment style does make a difference in investment returns. As a result, some financial academics are beginning to abandon the prior acceptance of efficient market theory and are offering alternative theories. The efficient market hypothesis states that prices of securities fully reflect available information. The implication is that one cannot beat the market except by chance and that investors should strive only to develop a broadly diversified portfolio weighted on the basis of current market values. The only relevant measure of risk under efficient market theory is beta – a measure of the tendency of a security’s price to respond to price changes of a broad-based market index. Accounting based measurements of risk are not relevant because all information about a company is already reflected in the price of their securities. Advocates of the new finance offer evidence that the financial markets are inefficient and that
