Abstract:

The investment CAPM provides an economics-based framework for Graham and Dodd’s (1934) Security Analysis, without mispricing. Expected returns vary cross-sectionally, depending on firms’ investment, expected profitability, and expected investment growth. Our framework also offers an appealing alternative to two workhorse accounting models. Empirically, many anomaly variables are associated with future investment growth, in the same direction with future returns. An expected growth factor earns on average 0.56% per month (t = 6.66), and adding it to the q-factor model improves the model’s performance substantially. In all, value investing is consistent with efficient markets.