does anyone have an explanation as why value stocks are trading at a premium compared to growth stocks but have lower volatility?
Please see page 326 First volume, CFA II
I interpret is as a return driver that is not explained by CAPM, hence the discrepancy, am I right?
I guess value stocks would have a premium as they are more of a safer bet which increases demand from most investors (they have more book value of assets relative to price)
Growth stocks would have much higher volatility as they are more risky investments
You mentioned that value stocks have lower volatility. I am not sure what volatility we are talking here. Is it volatility of dividend or volatility of return or volatility of earnings?
Value stocks provide premium due to additional risk factors embedded in it. These risk factors are -
- High volatility of earnings and dividends
- High debt to equity (distressed)
Because of these risk factors, CAPM was modified and value and size risk premiums were added.
However, there is another school of thought. And, it says that value premium is not due to risk factors. It is due to behavioural biases.
This second explanation says that people, in general, love to hear growth stories e.g. Tesla stocks, They think that past growth will continue in future. So, people care more about growing companies and less about distressed (value) stocks even with good fundamentals. So, that is why value premium exist.
I went through 2022 level 3 volume 1 page 83 to understand behavioural aspect of the premium. But, it is a potpourri there.
Overall, the cause of value premium is a debatable topic.
(I searched online and what i mentioned above is from online searches.)