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Affect in a behavioral asset pricing model

by

Meir Statman
Glenn Klimek Professor of Finance
Santa Clara University
Leavey School of Business
Santa Clara, CA 95053
mstatman@scu.edu

&

Kenneth L. Fisher
Chairman, CEO & Founder
Fisher Investments, Inc.
13100 Skyline Boulevard
Woodside, CA 94062-4547

&

Deniz Anginer
University of Michigan
daniger@bus.umich.edu

February 2008

We thank Ramie Fernandez, Murthy Krishna, Hersh Shefrin and Paul Slovic and
acknowledge support from The Dean Witter Foundation.

Electronic copy available at: http://ssrn.com/abstract=1094070

Affect in a behavioral asset pricing model

Abstract

Stocks, like houses, cars, watches and most other products exude affect, good or bad,
beautiful or ugly, admired or despised. Affect plays a role in pricing models of houses,
cars and watches but, according to standard financial theory, affect plays no role in
pricing of financial assets. We outline a behavioral asset pricing model where expected
returns are high when objective risk is high and also when subjective risk is high. High
subjective risk comes with negative affect. Investors prefer stocks with positive affect
and their preference boosts the prices of such stocks and depresses their returns.

Electronic copy available at: http://ssrn.com/abstract=1094070

according to standard financial theory. 155) Kahneman (2002) described the affect heuristic in his Nobel Prize Lecture as “probably the most important development in the study of judgment heuristics in the last decades. 154) and added “We sometimes delude ourselves that we proceed in a rational manner and weigh all the pros and cons of the various alternatives.” (p. cars. and. Peters. Slovic.Affect in a behavioral asset pricing model We admire a stock or despise it when we hear its name. often without consciousness. like houses. an ugly house. and MacGregor (2002) described affect. according to Fama and French (1992). whether Google or General Motors. market capitalization and book-to-market ratios in their 3-factor asset pricing model of risk. Finucane.” choose the jobs and houses we find ‘attractive. or a pretentious house” (p. an early proponent of the importance of affect in decision making wrote. good or bad. cars and watches but. Zajonc (1980). measured by beta. 1 . before we think about its price-to-earnings ratio or the growth of its company’s sales. Expected returns in the CAPM are determined by risk alone.’ and then justify these choices by various reasons. admired or despised. watches and most other products exude affect. “We do not just see house: We see a handsome house.” Affect plays a role in pricing models of houses. the specific quality of ‘goodness’ or ‘badness. Stocks. But this is rarely the case.’ as a feeling that occurs rapidly and automatically. Quite often ‘I decided in favor of X’ is no more than “I liked X’. We buy the cars we ‘like. affect plays no role in pricing of financial assets. beautiful or ugly. But affect plays a role in behavioral asset pricing models where we know it as ‘sentiment’ or as an ‘expressive’ set of characteristics.

and perhaps beauty. Statman (1999) described a behavioral asset-pricing model that includes utilitarian factors. Asset pricing models are intertwined with the efficient market hypothesis. not market efficiency. such as risk. For example. In contrast.000 Rolex watch and a $50 Timex watch have approximately the same utilitarian qualities. But Rolex buyers are willing to pay an extra $9. We find that the returns of stocks admired by respondents of the Fortune surveys were lower than the returns of less admired stocks. both watches display the same time. depicted in Figure 1.950 over the price of the Timex because of the affect of a Rolex. The cup of ice cream on the left contains 8 ounces of ice cream but its affect is negative since it seems stingy in its 10-ounce cup. and outline a behavioral asset pricing model. Rather. A $10. In particular. such as the negative affect of tobacco and other ‘sin’ companies or the positive affect of prestigious hedge funds. Hsee (1998) presented to subjects pictures of two ice cream cups. We find evidence consistent with our hypothesis. Hsee found that subjects who saw only one of the ice cream cups were willing to pay a higher price for 2 . Affect in pricing models There is considerable evidence that affect plays a role in pricing. we hypothesize that affect plays a role in pricing models of financial assets. we hypothesize that affect underlies the market capitalization and book-to-market factors of the 3-factor models. but we do not claim to have uncovered a new anomaly. the affect of the 7 ounces of ice cream on the right is positive since it is overflowing its 6-ounce cup. but our paper is about asset pricing models. He illustrated the model with an analogy to the watch market. consisting of prestige. is more positive than that of a Timex. but also expressive or affect characteristics.

But sometimes emotions subvert good thinking. ) Emotions prevent us from being lost in thought when it is time to act. “Goals and motivational weightings change. you cease to think about how to charm a potential mate… adrenalin spikes…” (p. as when stalked by predators. They described emotions as programs whose function is to direct the activities and interactions of sub-programs. Shiv and Fedorikhin (1999) described an experiment where subjects chose between a chocolate cake with intense positive affect but inferior from a cognitive perspective. Shiv and Fedorikhin found that subjects who were under the greater stress of memorizing the 3 . But subjects who saw the two cups side by side were willing to pay a higher price for the cup with 8 ounces of ice cream. cognitive science. Next. attention.the 7 ounces of ice cream with positive affect than for the 8 ounces of ice cream with negative affect. and a fruit salad with a less positive affect but superior from a cognitive perspective. memorizing a two-digit number. subjects were asked to walk over to another room. Cosmides and Tooby (2000) wrote that evolutionary psychology is a theoretical framework that combines principles and results from evolutionary biology. goal choice. while another was assigned a higher-stress task. Safety becomes a far higher priority…You are no longer hungry. memorizing a seven-digit number. On their way each could choose a chocolate cake or a fruit salad. anthropology and neuroscience to describe human behavior. it is grounded in evolutionary psychology. Affect is an emotion and. like all emotions. One group of subjects was assigned a low-stress task. Cosmides and Tooby illustrated with the emotion of fear. and physiological reactions. Reliance on emotions increases with the complexity of information and with stress. including those of perception.

seven-digit number were more likely to be guided by affect and choose the chocolate cake over the fruit salad.” He found that the fear they induced carried over beyond the movie. Stocks are notoriously complex and their evaluation is stressful. Dotcom names acquired negative affect in the bust years of the early 2000s and Cooper et al (2005) found that companies that changed their dotcom names to conventional names during that time experienced positive abnormal returns once more. ‘Incidental affect’ is different from integral affect in that it arises not from an object but from an unrelated event. 4 . such as a stock. increasing subjects’ risk aversion in choices unrelated to the movie. In the context of stocks. Internet related dotcom names had positive affect in the boom years of the late 1990s and Cooper et al (2001) found that companies that changed their names to dotcom names had positive abnormal returns on the order of 74% in the 10 days surrounding the announcement day. Are shares of Google at $700 per share better investments than shares of General Motors at $20 per share? Investors try to overcome the pull of affect through a systematic examination of relevant information. even when nothing about their business has changed. and Edmans et al (2007) found that the negative incidental affect of soccer losses brought low stock returns. For example. Hirshleifer and Shumway (2003) found that the positive incidental affect of sunny days brought high stock returns. but affect still exerts its power.’ This is affect that is associated with the characteristics of a particular object. Welch (1999) induced fear in subjects by showing them two minutes of Kubrick’s movie “The Shining. The findings of Cooper et al are examples of ‘integral affect.

the three-factor model presents expected returns as functions of beta. Market efficiency must be tested jointly with an asset pricing model. usually equated with the variance of a portfolio and the beta of a security within a portfolio. For example. alcohol and gaming companies. For example. a measure of objective risk. But what do market capitalization and book-to- market ratios represent? Fama and French argued that they represent objective risk but much of the evidence is inconsistent with their argument. but also as functions of market capitalization and book-to-market ratios. We hypothesize that the negative affect of despised companies in the Fortune surveys underlies their higher stock returns. This long term effect is evident in Hong and Kacperczyk’s (2007) study of ‘sin’ stocks. In contrast. The CAPM presents expected returns as a function of objective risk. The immediate effect of an increase in affect is an increase in stock prices but higher stock prices set the stage for lower future returns. Market efficiency and asset pricing models Fama (1970) noted that market efficiency per se is not testable. The objective measure of investment risk is based on the probability distribution of investment outcomes. Hong and Kacperczyk found that stocks of sin companies had abnormal positive returns during the1926 to 2004 time period. Lakonishok et al 5 . such as the CAPM or the three-factor model. But when it comes to tests of market efficiency the CAPM is quite different from the three-factor model. analogous to the higher returns sin company stocks. The negative affect of sin companies is reflected in social norms against vice. the excess returns relative to the CAPM of small-cap stocks and stocks with high book-to-market ratios might indicate that the market is not efficient or that the CAPM is a bad model of expected returns. namely those of tobacco.

not as a test of market efficiency. inconsistent with the view that value stock are riskier. This is because in an efficient market there are no stocks with high LTIV and no stocks with low LTIV. But 6 . The survey published in March 2007 included 587 companies. The Admired portfolio contains the stocks of companies with the highest LTIV scores and the Despised portfolio contains the stocks with the lowest scores. using a scale of zero (poor) to ten (excellent). Fortune asked more than 10. We focus on the attribute of Long-Term Investment Value (LTIV) since it reflects perceptions of respondents about company stocks. If Fortune respondents believe that the stock market is inefficient and they can indeed identify correctly the stocks with higher LTIV. If Fortune respondents believe that the stock market is efficient we should expect that they would rate all stock equally on LTIV. we should expect that stocks of companies with high LTIV would do better than stocks of companies with low LTIV. each consisting of an equally weighted half of the Fortune stocks. Consider two portfolios constructed by Fortune scores. directors and security analysts who responded to the survey to rate the ten largest companies in their industries on eight attributes of reputation. Skinner and Sloan (2002) found that the relatively high returns of value stocks are not due to their higher risk.000 senior executives. incorporating both their expected returns and risk. Similarly. We present 4-factor analysis of the data here for its insights into assets pricing models. they are due to large declines in the prices of growth stocks in response to negative earnings surprises. Rather. Fortune admired and despised Fortune magazine has been publishing the results of an annual survey of company reputations since 1983.(1994) found that value stocks outperformed growth stocks in three out of four recessions during 1963-1990.

September 30th 1982 – September 30th 2006 is divisible by all three periods so each time period is included in each analysis. This is because Fortune surveys are completed by respondents around September 30th of the year before they are published.43 of the Communication industry. 2006 was 19. Fortune respondents rate some stocks high on LTIV and other stocks low because they are influenced by the positive affect of the first group and the negative affect of the other. 1982 – September 30. We investigate three horizons. Fortune does not define how long long-term is. We calculate the mean score of companies in each industry in the surveys published in 1983-2007 surveys and define the industry-adjusted score of a company as the difference between its score in a given survey and the mean score of companies in its industry. We constructed portfolios similarly for the 3 and 4-year horizons. For the 2-year horizon we reconstituted each portfolio on September 30th every two years. 3. We argue that ratings of LTIV serves as a measure of affect. such as the 6. (Table 1) 7 . 1982. so the first reconstitution is based on the survey conducted in 1984 and published in 1985.12% mean annualized return of the Admired portfolio.14 of the Coal Mining industry.this is not what we find. based on the Fortune survey published subsequently in 1983. our overall 24-year period. 2. are higher on average than those of other industries. For example. The returns of the Despised portfolios exceeded those of the Admired portfolios. the mean annualized return of the Despised portfolio during September 30. The mean scores of companies in some industries. higher than the 15. We construct the portfolios on September 30. and 4 years. such as the 5. Fortunately.72% when the portfolio was rebalanced every four years.

since equal weighting creates a small-cap tilt.57% in the Admired portfolio. shows that companies in the Despised portfolios have higher objective risk than companies in the Admired portfolios. The tilts of the Despised portfolios toward small and value are consistently greater than those of the respective Admired portfolios and the momentum of the Despised portfolios is consistently lower than that of the Admired portfolios. 1 One part of the magnitude of the CAPM alphas in the Despised and Admired portfolios is likely due to their equal weighting. The alphas of Despised portfolios are positive and statistically significant in all reconstitution intervals. The 4-factor analysis also shows that the characteristics of small. presented in Table 2. CAPM alphas are lower in the Despised and Admired value-weighted portfolios than in the equally-weighted portfolios but the alphas of the Despised portfolios remain consistently higher than those of their respective Admired portfolios. Betas in the Despised portfolios are consistently higher than betas in the respective Admired portfolios. the annualized alpha of the Despised portfolio when portfolios are reconstituted every four years is 4. higher cash-flows-to-price ratios. Further analysis presented in Table 3 shows that companies in the Despised portfolios also had higher earnings-to- price ratios. 8 . lower past sales and earnings growth and lower returns on assets. The alphas of the Despised portfolios are consistently higher than those of their respective Admired portfolios. 1 Characteristics of despised and admired portfolios A 4-factor analysis. In contrast. none of the alphas of the Admired portfolios are statistically significant. The advantage of the Despised portfolios over the Admired portfolios remains intact when we assess them by the CAPM. The alphas of the Admired portfolios are always positive but statistically significant only in the 3-year reconstitution interval. The alphas of the Despised portfolios are positive and they are statistically significant with the exception of the portfolio reconstituted every two years. value and low short-term momentum are associated with the Despised portfolios.89% while it is only 1. For example.

high net- worth clients of an investment company. A CAPM- like asset pricing model based entirely on objective risk would lead us to expect a positive correlation between assessments of risk and assessments of expected returns but Ganzach found a negative correlation. One group was asked to judge the expected returns of the market portfolios of each stock market. When affect is positive benefits are judged high and risk is judged low. we asked investors. and a 10-point scale ranging from “bad” to “good”. For example. Slovic et al (2002) attribute that negative relationship to the halo of affect. their industries. Ganzach (2000) presented a list of 30 international stock markets to two groups of subjects.Affect in a behavioral asset pricing model The behavioral asset pricing model we outline is one where expected returns are high when objective risk is high and also when subjective risk is high. to complete a questionnaire listing only the names of 210 companies from the Fortune 2007 survey. while the other group was asked to judge the risk of these market portfolios. conducted in May 2007. We find similar results in our experiments. And when affect is negative benefits are judged low and risk high. High subjective risk comes with negative affect and low subjective risk comes with positive affect. In the first experiment. Subjective risk is different from objective risk. markets with high expected returns were perceived to have low risk. The questionnaire said: “Look at the name of the company and its industry and quickly rate the feeling associated with it on a scale ranging 9 . The negative relationship between subjective risk and expected returns in Ganzach’s study is one example of a general negative relationship between subjective risk and perceived benefits.

intuitive feeling. and stocks with negative affect are assessed low in future returns and high in risk. Another group of investors was asked to rate the risk of each stock on the same scale. 3 If investors’ assessment of risk reflects objective risk alone we should find a positive correlation between the risk scores and the return scores they assigned to companies. This negative correlation indicates that investors assessments of risk reflect subjective risk associated with affect. 3 We sent the questionnaire to 1800 investors in six groups of 300 each. Three groups received the return version of the questionnaire and three received the risk version. 162 from the second and 169 from the third. in a regression of Fortune scores on risk scores we find 2 We sent the questionnaire to 900 investors in three groups of 300 each. However. The list of stocks for each group included 70 of the 210 companies in the survey. (See Figure 2) In the second experiment. for a total of 501. We received 170 completed questionnaires from the first group. risk scores. Similarly. The list of stocks for each group included 70 of the 210 companies in the survey. The risk and return scores of companies are the mean scores assigned to them by the surveyed investors. as seen in Figure 3. Just go with your quick. The coefficient of the return scores is positive and statistically significant. and Fortune scores. 91 and 94 completed questionnaires for the return versions and 134. high return scores correspond to low risk score. Affect creates a halo over stocks. 74 and 83 for the risk version. we find a negative correlation between the two. for a total of 570. 10 . One group of investors was asked to rate the future return of each stock on a 10- point scale ranging from low to high.” The affect score of a company is the mean score assigned to it by the surveyed investors. Don’t spend time thinking about the rating. We also find a link between return scores. Stocks with positive affect are assessed high in future returns and low in risk. We received 94.from bad to good. 2 We found a positive and statistically significant relationship between affect scores and Fortune scores. conducted in July 2007 we presented to another group of investors the names and industries of the same 210 companies from the Fortune 2007 survey. In a regression of Fortune scores on return scores we find that high Fortune ratings are associated with high return scores.

This suggests that the association between short-term momentum and returns is not due to the role of short-term momentum as a proxy for affect. yet it is generally associated with high returns (Jagadeesh and Titman (1993)). the association between short-term momentum and returns has been attributed by Grinblatt and Han (2005) to the “disposition effect. Objective risk measured by beta and subjective risk measured by affect are two factors in the behavioral asset pricing model. Investor preferences and stock returns The road from the perception that admired companies offer both high expected returns and low risk to the low realized returns of such stocks is not straight. market capitalization which is also positively correlated with affect is generally associated with low returns.that high Fortune ratings are associated with low risk scores. Short-term (12-month) momentum is positively correlated with affect. The coefficient of the risk scores is negative and statistically significant. Short-term momentum is an especially interesting factor since its rationale is distinct from the rationale of affect.’ aware of the preferences of 11 . But they are not alone. But surely some investors are ‘contrarians.” described by Shefrin and Statman (1985) and by Sias (2007) to trading by institutional investors. In contrast. (See Figures 4 and 5) Objective risk measured by beta and subjective risk measured by affect are two factors in the behavioral asset pricing model. Indeed. Momentum is an especially interesting factor since its rationale is distinct from the rationale of affect. But they are not alone. as explained by Shefrin and Statman (1995) and more recently by Pontiff (2006). Suppose that typical investors prefer admired companies they perceive as having both high expected returns and low risk.

price gaps that are likely to close over a long period might widen further over a shorter period. cars or watches. Would arbitrage by contrarians not nullify any effect of typical investors on stock returns? Subjective risk stemming from affect plays no role in the asset pricing model if the effects of typical investors on stock returns are nullified by arbitrage. the portfolios of contrarians become less diversified and they take on more idiosyncratic risk. The demand and supply functions reflect the preferences of consumers and producers. Conclusion All asset pricing models. and with it. but as the amount devoted to such stocks increases. whether of securities. It is optimal for contrarians to increase their holdings of stocks of despised companies. In that model investors on both the demand and supply sides prefer mean-variance-efficient portfolios and the 12 . The demand and supply structure is evident in the CAPM. However. imagine contrarians who know that stocks of despised companies have high expected returns relative to their objective risk. To see the implications of imperfect arbitrage. are versions of the basic demand and supply model where prices are determined by the intersection of demand and supply. As some hedge funds and other unlucky investors found out. As we consider arbitrage and the likelihood that it would nullify the effects of the preferences of typical investors on stock returns we should note that no perfect (risk-free) arbitrage is possible here. limit their effect on stock returns.typical investors and seek capitalize on them by favoring stocks of despised companies. The increase in portfolio risk leads contrarians to limit the amount allocated to despised stocks. subjective risk plays a role in the asset pricing model if arbitrage is incomplete.

We study the preferences of investors as reflected in surveys conducted by Fortune magazine during 1983. We find additional evidence consistent with the hypothesis in our own surveys. This is consistent with the hypothesis that stocks with negative affect have high subjective risk and their extra returns compensate for that risk. those highly rated by the Fortune respondents. We find that the returns of admired stocks. often without consciousness.’ It is a feeling that occurs rapidly and automatically. We also find that market capitalization and book-to- market ratios are correlated with affect and argue that they proxy for it. High subjective risk comes with negative affect and low subjective risk comes with positive affect. were lower than the returns of despised stocks. those rated low. but the argument that market capitalization and book-to-market ratios proxy for risk is not fully supported by the evidence. Market capitalization and book-to-market ratios were associated with anomalies relative to the CAPM long before their debut in the 3-factor model.2006 and additional surveys we conducted in 2007. Affect is the specific quality of ‘goodness’ or ‘badness. Respondents in our surveys rate companies as if they believe that stocks with high 13 . We outline a behavioral asset pricing model where expected returns are high when objective risk is high and also when subjective risk is high. The demand and supply structure is not nearly as evident in the Fama and French 3-factor asset pricing model. Investors prefer stocks with positive affect and their preference boosts the prices of stocks with positive affect and depresses their returns.aggregation of their preferences yields an asset pricing model where expected returns of securities vary by beta. The purpose of this paper is to help link asset pricing models to the preferences of investors.

The affect factor in the behavioral asset pricing model elucidated the rationale underlying the market cap and book-to-market factors of the 3- factor model. the 3 and 4-facor models are behavioral models under their standard-finance skins. Moreover. Social responsibility is one source of positive affect.expected returns also have low risk and perceive stocks of companies admired by Fortune respondents as having both high expected returns and low risk. Prestige is another source of positive affect. affect has several distinct sources and these sources might play distinct roles in a behavioral asset pricing model. 14 . The number of factors in a full model is likely to grow to include factors such as liquidity that are not included in our behavioral model or in the 3 and 4-factor models. and tobacco companies lack it. and hedge funds posses it. Indeed. We emphasize that the behavioral asset pricing model we outline is not superior to the 3 or 4-factor models.

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Figure 1: Affect in the pricing of ice-cream cups. 5 oz. 7 oz. people are willing to pay more for 7 ounces with positive affect (cup filled generously) than for 8 ounces with negative affect (cup filled stingily) 10 oz. 8 oz. When cups are presented one at a time. Source: Hsee (1998) .

13 + 0.00 3.00 8.00 Affect Score .17 N = 210 ***Statistically significant at the 0.00 9.00 2. Figure 2: The relationship between affect scores and Fortune scores 10 9 8 7 Fortune Score 6 5 4 Fortune score = 2.00 5.00 10.56)*** 3 2 R = 0.00 1.00 4.01 level 2 1 0 0.00 7.60 Affect score (6.00 6.

0 7.0 8.0 2 R = 0.0 3.0 5.18 n = 210 2.0 Expected return score 6. Figure 3: The relationship between expected return scores and risk scores 9.0 7.0 0.01 level 1.0 6.2)*** 3.0 8.0 1.4 Risk score (-7.0 *** Statistically significant at the 0.0 5.0 Risk score .0 0.0 2.4 .0.0 4.0 Expected return score = 8.0 4.

0 2.0 3.00 Fortune score 6.0 9.0 7.0 6.00 5.0 5.00 Fortune score = 2.00 3.00 2.00 4.01 level 7.00 (6.0 4.6 Expected return score 9.0 Expected return score .0 1.00 0.18 8.0 8.00 0.00 n = 210 ***Statistically significant at the 0.8)*** R2 = 0. Figure 4: The relationship between expected return scores and Fortune scores 10.00 1.7 + 0.

00 0.3 Risk score (-3.0 2.05 n = 210 2.00 ***Statistically significant at the 0.00 Fortune score = 8.00 R2 = 0.0 Risk score .00 4.3)*** 3.0 1.00 Fortune score 6.0 4. Figure 5: The relationship between risk scores and Fortune scores 10.00 5.00 9.00 8.0.01 level 1.00 7.0 .00 0.0 3.0 5.0 6.0 7.0 8.

84*** 44.60% CAPM-Based Performance2 Annualized Alpha 4.86 .95* Market 1.04 0.04 t-stat 31.82*** 1. Mean annualized return 17.43% t-stat 2.31 Market 1.12% 4.98 0.58*** Adj R^2 0.83% 16.82*** Adj R^2 0.87 Portfolios reconstituted every 4 years.57% 3.52% t-stat 2.24*** 44.98 0.32% t-stat 2.02% 1.September 30.06 t-stat 30.34% 2 CAPM-Based Performance Annualized Alpha 4.17** 1.89% 1.66*** 42.96*** Adj R^2 0.29% 1.76 0.37% 1.72% 15. 2006.43** 1.03 1.65% 3.05 t-stat 31.00 0. Mean annualized return 19.Table 1: CAPM-based performance of Admired and Despised portfolios: September 30.99% 15.1 Despised Admired Difference Portfolios reconstituted every 2 years. Mean annualized return 18.94% 2.87 Portfolios reconstituted every 3 years.77 0.77 0.81% CAPM-Based Performance2 Annualized Alpha 3.03 0.81% 2.67* Market 1. 1982 .

35% 1.81*** -1.72*** Adj R^2 0.09 -0.70*** -0.32 0.09 t-stat -8. 2006.42*** 10.09 t-stat 45.29 t-stat 15.55 0.30 0. 4-Factor Based Performance2 Annualized Alpha 1.46 Value-minus-Growth 0.55% t-stat 1.53*** -5. 1982 .29 0.60*** 54.17 1.92 Portfolios reconstituted every 4 years.75*** 53.09% t-stat 1.22 -0.02% 2.19 -0.89 0.08 t-stat 44.92 1 Portfolios are equally weighted .83 Market 1.04 0.29% 0.01*** Small-minus-Big 0.39 t-stat 10.92 Portfolios reconstituted every 3 years.59 0.11 -0.66*** Momentum -0.04 0.36 -0.90 0.32 -0.60*** -4.11*** Momentum -0.17 1.07% -0.08*** Small-minus-Big 0.54*** 9.02 0.05 0.Table 2: 4-factor-based performance of Admired and Despised portfolios: September 30.35 -0.26*** 9.90% 0.96 Value-minus-Growth 0.1 Despised Portfolio Admired Portfolio Difference Portfolios reconstituted every 2 years.95*** Adj R^2 0.September 30.18*** 52.06 t-stat 44.25*** -1.89 0.36 Market 1. 4-Factor Based Performance2 Annualized Alpha 2. 4-Factor Based Performance2 Annualized Alpha 1.64 -0.25*** -5.09 0.57 0.99*** Value-minus-Growth 0.25 t-stat 14.41 t-stat 11.18 1.34 t-stat 9.11 t-stat -9.03 Market 1.11 -0.81% 0.57 0.15 t-stat -10.24 -0.95*** Momentum -0.26 t-stat 14.94*** Adj R^2 0.48% t-stat 1.09 0.61*** Small-minus-Big 0.10 0.

Earnings are in the fiscal year prior to portfolio formation and price at the end of September of the portfolio formation year. 1982 .040 1 Market capitalization is at the end of September of the portfolio formation year.103 0. three.44% 79. 36 and 60 months prior to the end of September of the portfolio formation year.24% 38.2005.Table 3: Characteristics of stocks in admired and despised portfolios.853 Book-to-Market ratio 0.06% Returns in the previous 3 years 81. Cash flow (Earnings + Depreciation) in the fiscal year prior to portfolio formation and price at the end of September of the portfolio formation year. These ratios are set to zero if they are negative.491 0.50% Market Capitalization ($ millions)1 19. Sales growth is log change in sales in the two fiscal years prior to the end of September of the portfolio formation year.125 Beta 0.47% Returns in the previous 5 years 169.327 5.035 Earnings Growth 0.127 0. Stocks in the Despised Stocks in the Admired Portfolio Portfolio Returns in the previous year 21.158 0. Beta are from 60 monthly returns (and minimum 36 months) prior to the end o . Earnings growth is log change in earnings in the two fiscal years prior to the end of September of the portfolio formation year.052 Return on Assets 0.57% 11. Return on Assets (ROA) is calculated as the ratio of operating income before depreciation to total assets at the end of the fiscal year prior to portfolio formation.751 Earnings-to-Price ratio 0.066 0.101 0.136 Sales Growth 0. Book equity (defined as in Davis. French 2000) at the end of the fiscal year prior to portfolio formation and price at the end of September of the portfolio formation year. Fama. and five previous year returns are the returns during 12.980 1. Mean Values as of September 30 of each year.079 Cash-Flow-to-Price ratio 0. One.