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Building Optimal Value Portfolios

In 1981, Sanjoy Basu’s paper, “The Relationship Between Earnings’ Yield, Market Value and Return for NYSE Common Stocks,” found that the positive relationship between the earnings yield (E/P) and average return is left unexplained by market beta.

Then, in 1985, Barr Rosenberg, Kenneth Reid and Ronald Lanstein uncovered the positive relationship between average stock returns and book-to-price (B/P) ratio in their paper, “Persuasive Evidence of Market Inefficiency.”

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