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

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  • Kuan Xu
  • Gordon Fisher

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.

Suggested Citation

  • Kuan Xu & Gordon Fisher, 2006. "Myopic loss aversion and margin of safety: the risk of value investing," Quantitative Finance, Taylor & Francis Journals, vol. 6(6), pages 481-494.
  • Handle: RePEc:taf:quantf:v:6:y:2006:i:6:p:481-494
    DOI: 10.1080/14697680600780934
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