Investments, tenth edition

 Figure 11.6 

Return to style portfolios as predictors of GDP growth. Average difference 

in the return on the style portfolio in years before good GDP growth versus in years with 

bad GDP growth. Positive value means the style portfolio does better in years prior to 

good macroeconomic performance. HML  5  high minus low portfolio, sorted on ratio of 

book-to-market value. SMB  5  small minus big portfolio, sorted on firm size.  

 Source: Reprinted from J. Liew and M. Vassalou, “Can Book-to-Market, Size, and Momentum Be Risk Factors That 

Predict Economic Growth?”  Journal of Financial Economics  57 (2000), pp. 221–45. Copyright 2000, with permission 

from Elsevier. 

40

 Josef Lakonishok, Andrei Shleifer, and Robert W. Vishny, “Contrarian Investment, Extrapolation, and Risk,” 

Journal of Finance 50 (1995), pp. 541–78. 

41

 Raphael La Porta, “Expectations and the Cross Section of Stock Returns,” Journal of Finance 51 (December 

1996), pp. 1715–42. 

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  The Efficient Market Hypothesis 

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earnings growth. Analysts seem overly pessimistic about firms with low growth prospects 

and overly optimistic about firms with high growth prospects. When these too-extreme 

expectations are “corrected,” the low-expected-growth firms outperform high-expected-

growth firms.