Which of the following is a justification of a value investing strategy? A) The value of stock is volatile so a cheaply priced stock will see an increase in value in the future. B) Current depressed earnings will rise in the future as they revert to the mean. C) The investor can add value using proper analysis of the risky firm.
A
Q bank me too choose an answer…out of lack of good choices
B
i’d say C… A and B just seem like the stock is just going to somehow improve on its own. though if you have highly diversified basket of value stocks, then you could argue you are just playing a bias in which case B might apply
B
I’ll say B. . . but this question is very poorly worded.
Your answer: B was correct. There are two justifications for a value investing strategy. The first is that although a firm’s earnings are depressed now, the earnings will rise in the future as they revert to the mean. One of the risks of this strategy however is that there is a good reason why the stock is priced so cheaply. Some stocks will take a long time to increase in value. The investor needs to consider this before investing. The second justification for value investors is that growth investors expose themselves to the risk that earnings and price multiples will contract for high-priced growth stocks. --------------------------------------------------------------------------------