Size Effect

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• Hypothesis: Abnormal Returns in Small Firm Portfolios – CAPM implies that any two assets with the same beta will have the same expected return. – Mean abnormal returns are zero. – According to CAPM, mean abnormal returns should be zero because all the portfolios have betas near one, which should approximate the return of the market as a whole.
Abnormal Returns in Small Firm Portfolios Results: – Portfolio with smallest firm on average experienced returns >20% a year higher than portfolio with largest firms. – Investors can form portfolios that systematically earn abnormal returns based on firm size. – Persistence of small firm abnormal returns reduces the chance that the results are due to market inefficiencies. – CAPM does not adequately describe stock return behavior.
Page 1 and 2: Size Effect Collaborative Effort by
Page 3 and 4: CAPM Capital Asset Pricing Model
Page 5 and 6: • Weak-Form EMH EMH Efficient Mar
Page 7 and 8: EMH Efficient Market Hypothesis •
Page 9: • The Test: Abnormal Returns in S
Page 13 and 14: • The Test: Portfolio strategies
Page 15 and 16: Portfolio strategies based on marke
Page 17 and 18: • Results (cont’d): Portfolio s
Page 19 and 20: CONCLUSION • What have we learned
Page 21 and 22: NEXT STEP • Real-World Applicatio
Page 23 and 24: NEXT STEP
Page 25 and 26: NEXT STEP • Recent Returns of Sma

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