Asymmetry in asset returns is a puzzling phenomenon and causes different investor behavior. Some show a preference for stocks with a significant right bias, which, like playing the lottery, hit the jackpot every once in a while and offer outsized returns. Other investors try to steer clear of such volatility and opt for stocks that are unbiased or even biased to the left.
But how is the bias in returns related to other factors in asset prices? Might investors bet on particular factors precisely because they want lottery-like asymmetry in their returns?
To answer these questions, we build cross-sectional growth and value portfolios and examine the distribution of monthly returns over five-year periods. Drawing on an investment universe of all stocks traded on the NYSE and NASDAQ since 1975, we build our growth and value portfolios from the quintile of stocks with the highest and lowest P/E ratios, respectively.
Our growth portfolio exhibited more skew to the right in its returns, on average, than our value portfolio. This held true for 6 of the 10 time periods.
Growth Stocks: Monthly Returns
| Mean | Median | Volatility | Obliquity | |
| 1975 to 1980 | 3.02% | 0.78% | 53.24% | 8.92 |
| 1980 to 1985 | 1.33% | 0.02% | 44.26% | 1.10 |
| 1985 to 1990 | 2.04% | 0.85% | 55.99% | 20.44 |
| 1990 to 1995 | 1.88% | 0.38% | 59.80% | 10.51 |
| 1995 to 2000 | 3.44% | 1.44% | 67.22% | 8.99 |
| 2000 to 2005 | 1.43% | 0.01% | 71.05% | 2.54 |
| 2005 to 2010 | 0.71% | 0.02% | 48.44% | 2.14 |
| 2010 to 2015 | 1.50% | 0.90% | 41.30% | 7.30 |
| 2015 to 2020 | 6.94% | 0.57% | 50.22% | 9.97 |
| 2020 to 2022 | 1.22% | 0.28% | 59.21% | 5.10 |
| Average | 2.35% | 0.52% | 55.07% | 7.70 |
Value Stocks: Monthly Returns
| Mean | Median | Volatility | Obliquity | |
| 1975 to 1980 | 2.44% | 0.00% | 47.26% | 2.07 |
| 1980 to 1985 | 1.66% | 0.01% | 44.25% | 1.94 |
| 1985 to 1990 | 1.26% | 0.02% | 48.23% | 14.73 |
| 1990 to 1995 | 1.26% | 1.02% | 55.05% | 2.55 |
| 1995 to 2000 | 1.23% | 0.00% | 52.13% | 5.62 |
| 2000 to 2005 | 2.43% | 1.15% | 18.08% | 9.31 |
| 2005 to 2010 | 0.68% | 0.00% | 48.75% | 2.24 |
| 2010 to 2015 | 1.70% | 1.02% | 38.59% | 1.85 |
| 2015 to 2020 | 0.86% | 0.56% | 36.92% | 1.45 |
| 2020 to 2022 | 1.38% | 0.53% | 82.10% | 9.30 |
| Average | 1.49% | 0.43% | 47.13% | 5.10 |
So what can we deduce from these results? Our theory is that asymmetry tends to move based on investor preferences. That is, when a particular factor is in fashion, the asymmetry increases significantly while it is in fashion. For example, growth stocks were all the rage when the dot-com bubble inflated from 1995 to 2000, and they demonstrated significant asymmetry, while value stocks clearly lacked it.
Growth Stocks: Monthly Returns, 1995 to 2000
The popularity of growth took off again in the 2010 to 2020 period, while the stock underperformed and again showed a lack of asymmetry in returns.
Value Stocks: Monthly Returns, 2010 to 2015
Now, these results do not tell us in which direction the association is going, only that there is an association. The data suggests to us that when a particular style of asset pricing is popular with investors, returns from that style show greater asymmetry.
In short, investors in growth stocks may be looking for lottery-like payouts, especially when such stocks are hot.
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All messages are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: ©Getty Images/piotr_malczyk
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derek horstmeyer
jordan doyle
