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Why would a Portfolio Manager like High BOOK TO MARKET Securities

dhrupesh

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I am studying book 1, CAPM, APT and Fama French three factor model. Under HML (High Minus Low), it is suggested that portfolio manager would hedge Long on High Book to Market ratio and Short on Low Book to Market ratio. My question is why?

assume if the book price of Apple is $10 and Market price is $100 then Book to Market ratio is = 0.1
and assume book price of Yahoo is $10 and Market price is $20 then Book to Market ratio is = 0.2

Why Portfolio manager will do long on Yahoo (High BML) and Short on Apple(low BML)?

I might be missing something. Can someone elaborate with example?
 
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ShaktiRathore

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#2
Hi,
Yes high BML implies high Book to Market ratio which implies low Market to Book(low Price to Book),we know that the stock selling with low Price to Book must be bought or one should go long on them,while low BML implies high Market to Book(high Price to Book),we know that the stock selling with high Price to Book must be sold or one should go short on them.Both companies are in same industry go long on stock with lower Price to Book ratio(Yahoo) and short on stock with higher Price to Book(Apple).
Here Yahoo with high BML(.2) or lower Market to Book ratio of (1/.2=5) must be one where long position must be entered into.While Apple with low BML(.1) or higher Market to Book ratio of (1/.1=10) must be one where short position must be entered into.
thanks
 

mtakroosta

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#4
Hi,
Yes high BML implies high Book to Market ratio which implies low Market to Book(low Price to Book),we know that the stock selling with low Price to Book must be bought or one should go long on them,while low BML implies high Market to Book(high Price to Book),we know that the stock selling with high Price to Book must be sold or one should go short on them.Both companies are in same industry go long on stock with lower Price to Book ratio(Yahoo) and short on stock with higher Price to Book(Apple).
Here Yahoo with high BML(.2) or lower Market to Book ratio of (1/.2=5) must be one where long position must be entered into.While Apple with low BML(.1) or higher Market to Book ratio of (1/.1=10) must be one where short position must be entered into.
thanks
Hi
Thank you for your answer
Frankly, after I read GARP material I didn't get convinced about the logic, neither have I been persuaded after I read the above discussion.
I mean, If our criteria were P/E it could be making more sense, but with BML it doesn't. Thanks
 
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