Does a portfolio of growth stocks outperform a portfolio of value stocks? : Evidence from Sweden and Norway

Abstract: A high return is a driving factor for most investors. The ways to reach success are many and different investment strategies on how to earn high returns have been discussed for decades. Value stocks (low P/E ratios) and growth stocks (high P/E ratios) are two strategies among the investment area with different and contrary results on which strategy can give the highest possible return. However, studies of the P/E effect have shown different results the last years compared to previous findings of a value premium for low P/E stocks, with trends of a higher return for growth stocks compared to value stocks. This led us to the research question “Does a portfolio of growth stocks present a higher return than a portfolio with value stocks on the Swedish and Norwegian stock markets?”. The problem that the study aims to answer is therefore if a portfolio of growth stocks provides a higher return than a portfolio of value stocks between the years 2001-2021. The long timespan will give us the opportunity to evaluate the stock markets during both booms and busts. Our study is made on historical data on the Swedish and the Norwegian stock markets since we found a lack of previous research in these countries within the research area. To fulfil the purpose of the study and to answer the research question, a quantitative method is used with historical data provided from Eikon (Thomson Reuters DataStream) where firms are sorted on the P/E ratios and after that growth and value portfolios are created. We will present both the actual return as well as a risk adjusted return for the stocks. The risk adjusted returns are conducted by using the financial measurements Sharpe ratio and Jensen’s alpha. The result of the study shows that on a 5 % significance level, growth stocks presented a higher actual return than value stocks for both Sweden and Norway. The same evidence was found for the returns for growth stocks compared to market index. Though, when testing the risk adjusted returns, the null hypothesis could not be rejected, which implies that a statistical difference between the portfolios could not be found.