Two mutual fund managers are discussing their investment strategies over lunch. The first manager follows a value-oriented strategy of selectively buying stocks with high equity book-to-market ratios. The second manager prefers firms with high earnings growth that hopefully will lead to high stock price appreciation.
a. Which manager is likely to see higher returns over a 1-year investment horizon? Why?
b. Which manager is likely to see higher returns over a 10-year investment horizon? Why?
c. Which manager is likely to see higher returns on a risk-adjusted basis over a 10-year investment horizon? Explain your answer.