Now let’s look at the third factor, the value factor. There is research to suggest that stocks that have a high book value, relative to their market price, tends to outperform stocks with lower book value. Put another way, stocks that are cheap relative to their fundamentals, tend to outperform stocks that are expensive, relative to their fundamentals. Stocks with high fundamental valuations, relative to market price, are often called value stocks. Stocks with high market price, relative to their fundamental valuations, are called growth stocks. Remember from the previous discussion of the size factor that we can create a theoretical long/short portfolio in order to express the hypothesis that value indicates an additional boost and returns relative to growth. To do this, first, sort the stocks in the estimation universe by their book-to-market value. Stocks with high book-to-market values, those that are above the 70th percentile, are grouped into a portfolio called value or high, where high refers to high book-to-market value. Stocks with low book-to-market values, below the 30th percentile, are placed into a portfolio called growth or low, where low refers to low book-to-market value. Note that these percentile cutoffs are the ones used in the Fama-French model. Next, calculate the equal weighted return of the value portfolio and equal weighted return of the growth portfolio. The long/short portfolio can be constructed by buying the value portfolio and shorting an equal dollar amount of the growth portfolio. The daily returns of this long/short portfolio gives us the factor return of the value factor, which we can now use in a factor model. In the Fama-French model, the value factor is written as HML. This stands for High Minus Low, where High refers to the value portfolio and Low refers to the growth portfolio.