By S. P. Kothari
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M2 M2 (%) 12 10 8 6 4 2 0 0 20 40 Tilt (%) C. 9, even though shorting the low-BV/MV (negative-alpha) stocks increases the alpha a bit. 4 percent for Q5. The residual risk of the spread would be dampened if the residual returns for value and growth were positively correlated (they would be partially hedged in the spread), but in fact, the correlation is negative. As a result, one would be much better off investing in a value strategy that emphasizes high-BV/MV stocks than trying to exploit the spread.
Summary. Our results on the benefits of tilting an investment portfolio toward stocks of extreme size, value versus growth, or momentum quintiles based on the 36 years of return data studied lead to several conclusions. First, given our price and market-cap filters, portfolio efficiency is not improved much by tilting portfolios toward extreme size quintiles. Combining the market portfolio with value (high-BV/MV) stocks or past winners (momentum stocks) results in significant increases in the Sharpe ratio and M 2.