Mispricing Drives Value Premium

There’s extensive literature documenting that value stocks (the stocks of companies with low prices relative to a valuation metric, such as earnings, book value, cash flow or sales) possess a strong, persistent and pervasive tendency to outperform growth stocks.

While there’s no debate about the existence of the value premium, there’s a major debate about the source of the return differential. Some argue that returns reflect compensation for risk; others argue for mispricing.

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