I will now examine the effectiveness of the Book/Market ratio in predicting stock market returns. The Book to Market ratio is used to compare the book value and market value of the company. Book value is calculated based on the book value of the business. The market value is determined by the market capitalization in the stock market. It is then found using the formula Book value of the company / Market value of the company. Its purpose is to identify any stocks that may 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 shown by the book-to-market ratio of individual stocks. In Pontiff (1998), two measures of book-to-market ratio were used. One was the Dow Jones Industrial Average (DJIA) and the other was the Standard and Poor (S&P) Index. The forecasting ability of the DJIA's book-to-market ratio is more accurate for the years before 1960, while the S&P's book-to-market ratio provides predictive ability for the period after 1960. However, the S&P's ratio is dramatically weaker of DJIA results for the period before 1960. (Pontifice 1998, p. 141). One of the main reasons for the book-to-market ratio's ability to predict stock market returns is that book value serves as a proxy for future cash flows. We know that if we divide a cash flow proxy by the current market price, it produces a variable that can be related to future market returns. If better proxies are used, the correlation is even greater. By dividing the book value, considered a proxy for future cash flow, by the price level or market value, we obtain a proxy for the discount rate. If we take an aggregate measure of the book-to-market ratio, we can say that it predicts...... middle of the paper... ck return predictability: is it there? Review of Financial Studies 20(3), 651−707.Fama, E.F., French, K.R., 1988. Dividend yields and expected stock returns. Journal of Financial Economics 22(1), 3−25.Fama, E.F., 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 look at 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, D.E., Wohar, M.E., 2006. In-sample and out-of-sample tests of stock return predictability in the context of data mining. Journal of Empirical Finance 13(2), 231–247.