The Value Risk Factor

Value
Value

The third risk factor in the Fama/French model is the "value risk factor," which refers to the amount of a portfolio's exposure to value or low-priced stocks relative to their book value. Value is measured by the book-to-market (BtM) ratio. The book value of a company is an accounting term for its net worth, its assets minus its liabilities. The market value of a company is its price per share times the number of shares outstanding. Stocks with higher BtM ratios are considered value stocks while stocks with lower BtM ratios are considered growth stocks. Figure 8-9 plots the risk and return characteristics and the growth of $1 for the value risk factor for the five quintiles of the U.S. stock market from 1928 through 2013.

Figure 8-9

Step 8Value FactorPortfolio's Exposurebook-to-market ratioBtM ratiovalue stocksgrowth stocks