Abstract

We argue that loadings on the HML factor cause the Fama-French three-factor model to provide a downward bias of the performance of value portfolios. It is shown that value dominates growth in comparisons of realized risk and returns. When using only the market and the size factors to adjust returns, growth always has significantly negative risk-adjusted returns and value always has positive risk-adjusted returns. Although realized risk is always significantly lower for value portfolios, including HML in measuring risk-adjusted returns results in an increase in risk-adjusted returns for growth portfolios and a decrease in risk-adjusted returns for value portfolios.