I will now examine the effectiveness of the Book to Market ratio in predicting stock returns. The Book to Market ratio is used to compare the book value and market value of the company. Book value is calculated by the book value of the company. Market value is determined by market capitalization on the stock exchange. It is then found using the formula Book value of the company / Market value of the company. Its objective is to identify securities likely to be undervalued or overvalued. From the research of Fama and French (1992), we can see that the cross-sectional variation in stock returns can be illustrated by the book-to-market ratio of individual stocks. In Pontiff (1998), two measures of the book-to-market ratio were used. One was the Dow Jones Industrial Average (DJIA) and the other was the Standard and Poor's Index (S&P). The forecasting ability of the book-to-market ratio of the DJIA is more accurate for years before 1960, while the book-to-market ratio of the S&P gives predictive ability for the period after 1960. However, the relationship of S&P is considerably lower than the DJIA findings for the period before 1960. (Pontife 1998, page 141). One of the main reasons for the book-to-market ratio's ability to predict stock returns is that book value acts as an indicator of future cash flows. We know that if we divide a cash flow indicator by the current market price, we get a variable that can be correlated to future market returns. If better proxies are used, the correlation is even greater. By dividing the book value, considered an approximation of future cash flows, by the price level or market value, we obtain an approximation of the discount rate. If we take an overall measure of the book/market ratio, we can say that it predicts...... middle of paper ......ck return predictability: is it there? Review of Financial Studies 20(3), 651−707. Fama, EF, French, KR, 1988. Dividend yields and expected stock returns. Journal of Financial Economics 22(1), 3−25.Fama, EF, 1991. Efficient capital markets: II. Journal of Finance 46(5), 1575−1617. Goyal, A., Welch, I., 2003. Predicting stock premium with dividend ratios. Management Science 49(5), 639−654.Goyal, A., Welch, I., 2008. A comprehensive overview of the empirical performance of stock premium forecasting. Review of Financial Studies 21(4), 1455-1508. Lettau, M., Ludvigson, S., 2001. Consumption, aggregate wealth and expected stock returns. Journal of Finance 56(3), 815−849.Rapach, DE, Wohar, ME, 2006. In-sample and out-of-sample tests of the predictability of stock returns in the context of data mining. Journal of Empirical Finance 13(2), 231–247.