Can Composite Value Measures Enhance Portfolio Performance?

A Closer Look at Value Premium: Literature Review and Synthesis

“…In contrast, Dhatt et al . () did so for the same valuation ratios employed by the former authors. However, the latter authors used a somewhat simpler methodology in constructing the quintile portfolios instead of the decile portfolios employed by the former ones.…”

“…() found that for small‐cap U.S. stocks, S/P was a better indicator of value than B/P, which in turn was superior to E/P. The same authors also reported the superiority of S/P over B/P, E/P, and CF/P in terms of both value premium and value portfolio returns for the sample of larger‐cap U.S. stocks, although the composite value measure based on combining the S/P and E/P criteria generated marginally higher returns (Dhatt et al ., ). Leledakis and Davidson () also reported higher value decile returns and higher value premium for the portfolios formed on S/P than those based on B/P.…”

“…For example, for the large sample of tradable NYSE and NASDAQ stocks, Dhatt et al . () found that among 16 different portfolio formation criteria, which included the size criterion, the B/P, CF/P, E/P, and S/P, and 11 combination criteria formed as the combinations of the four last‐mentioned ratios, the lowest risk and the highest return/risk ratio were documented for the CF/P value portfolio. Desai et al .…”

“…At the first stage, Dhatt et al . () standardized each of the valuation ratios of a firm in a particular year by the median value of that ratio for all the firms in their final sample in that year. At the second stage, composite value measures were computed as simple averages of different combinations of these relative valuation ratios.…”

“…Following the methodology developed by Dhatt et al . (), Leivo and Pätäri () reported the results for nine different value‐only strategies that included three combination strategies. The authors compared the performance of sextile portfolios formed on the two combinations of D/P and two three combinations of which the first is based on D/P, B/P, and EBITDA/EV, and the second on D/P, B/P, and E/P.…”