Question 2 Growth and value can be interpreted in different ways. Growth brings the notion that the portfolio focuses upon firms which have excellent future earnings per share (EPS). Small current yield, large price-to-book (P/B) ratio and large price-to-earnings (P/E) ratio are usual features of such portfolios. Value typically brings the idea of portfolios focusing or including only issues showing low P/B ratios, low P/E ratios, excellent dividend yield and undervalued stock prices. Required: (a) Identify and explain why, over a long period of time, value equity investment will outperform growth equity investment.
(b) Explain why the consequence in (a) will be impossible in an efficient market.