Impact of investment horizon on the performance of value versus growth styles and style allocation

Jia Wang ()
Additional contact information
Jia Wang: Rowan University, Glassboro

Journal of Asset Management, 2011, vol. 12, issue 6, No 7, 438-446

Abstract: Abstract Most literature on time diversification focuses on the risks of stocks versus bonds. Little attention has been given to the impact of time horizon on the risks for value versus growth stocks. With the growing popularity of those two investment styles, it is in great need to analyze the time changing nature of risks for value versus growth styles. This article seeks to fill in the void. We study three downside risk measures: shortfall risk, expected loss and lower partial standard deviations (LPSDs), for value versus growth styles across different holding periods. We find that all the three risk measures decline when time horizon lengthens. The benefit of time diversification is greater for value stocks than for growth stocks. And value stocks outperform growth stocks in terms of both risks and returns in the long run. Does this mean that an investor should increase his/her investment in value stocks for longer investment horizons? We further explore the optimal mix of value and growth stocks across time horizons. Interestingly, even though value stocks dominate growth stocks in both risks and returns in the long run, adding growth stocks to value stocks is still beneficial. With rolling window analysis (when the returns are autocorrelated), the optimal weights for value stocks are approximately 50 per cent, 40–50 per cent and 30–40 per cent in order to minimize shortfall risk, expected loss and LPSDs, respectively, for an investment window of 1–15 years. With bootstrap analysis (return distributions are independent), the optimal weights for value stocks increase as time horizon lengthens. However, even for the 15-year window, the optimal portfolio still has about 30 per cent growth stocks. In other words, style diversification is still important even in the long run.

Keywords: time diversification; value; growth; downside risk; style allocation (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1057/jam.2011.20 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:assmgt:v:12:y:2011:i:6:d:10.1057_jam.2011.20

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41260

DOI: 10.1057/jam.2011.20

Access Statistics for this article

Journal of Asset Management is currently edited by Marielle de Jong and Dan diBartolomeo

More articles in Journal of Asset Management from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().