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Myopic loss aversion and margin of safety: the risk of value investing

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  • Kuan Xu
  • Gordon Fisher
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Abstract

This paper examines the risk of value investing from the point of view of a myopic loss-averse investor holding a diversified portfolio and relying on infrequent portfolio rebalancing. This closely resembles purchasing a large portfolio, such as those created by BARRA, and following a buy-and-hold investment strategy. In these circumstances, which portfolio, value or growth, is riskier to a myopic loss-averse investor? To facilitate analysis, a myopic loss ranking and a corresponding statistical procedure are developed and applied to investment-style data provided by BARRA. The paper qualifies the conditions under which value investing is more risky in North American financial markets.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/14697680600780934
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 6 (2006)
Issue (Month): 6 ()
Pages: 481-494

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Handle: RePEc:taf:quantf:v:6:y:2006:i:6:p:481-494

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Related research

Keywords: Myopic loss aversion; Stochastic dominance; Statistical test; Investment style; Value and growth; Value-index investment;

References

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