For this particular section, the first topic has been selected in which it will be evaluated if value is riskier than growth or not. Under this evaluation, this section will be examining evidences against and for the rational risk pricing. There are multiple facets of a risk, and it can be best managed and understood by the use of several approaches, and in accordance with liabilities. Not every investment will be involving equal risks to each and every investor.
Value stocks have been earning higher average returns in comparison with growth stocks. One crucial explanation is that risk varies in terms of time. This means that the risk of strategies involving value minus growth is considerably high during difficult periods. This is the time when premium for risk expected is considerably high. This turns out to be low during good times when the premium for risk expected is considerably low. Value stocks are known to be having high returns in comparison with growth stocks. A research by Petkova and Zhang (2012) studies the relative risk involved in growth stocks and value stocks with respect to the economic scenario. Some of the researchers in this field refer to rational risk pricing theory, and other researchers consider the concept of behavioural finance. It was earlier claimed by the zealots that value premium resulted in fundamental risks for each and every investor. It has been stated by behaviourists, on the other hand, stating value assists in outperforming as investors hold the tendency of making major mistake. It has further been stated that there is no efficiency in markets and investor biases have a substantial impact on security prices.
Several researchers such as Lakonishok (2004) and Gobellini (2011) have stated that both growth stocks and value stocks have relative risks. In the field of modern finance, the landmark of most prominence is the one related to risk and return. When this is claimed, there are evidences that stating growth stocks can deliver lower returns when compared to the returns of value stock. The most significant risk is regarding the variation of time. This particular risks expose certain strategic risks in which there is deduction of growth from value (Barberis and Thaler, 2014). This will be higher in the duration of crisis. No crucial role is played by risk in the generation of value premium. Because of aggressive behaviour of trading, overconfident investors should be paying significant value of commissions.