Size Effect

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Portfolio strategies based on market capitalization • Transaction Cost: *Considering Transaction Costs – Estimated average of 950 stocks used per year, 95 stocks per portfolio – Used Current costs of $10 per trade • Cumulative transaction costs: – $32,300 for actively managed portfolio – $1,900 for passively managed portfolio • Transaction costs in 1960’s s & 1970’s s >> today’s
CONCLUSION • What have we learned from these 2 papers? – Using a CAPM Market Risk Premium of 9% to compare a Large Cap Stock with a Small Cap Stock: – Reinganum disproved CAPM. – Small Cap stocks out perform Large Cap stocks even after additional Risk is considered. Portfolio Type: *Beta: E(R i ) CAPM: *R i : Observed: Small Cap Portfolio Large Cap Portfolio 1.58 16.22% 32.77% 0.96 10.64% 9.47%
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 and 10: • The Test: Abnormal Returns in S
Page 11 and 12: Abnormal Returns in Small Firm Port
Page 13 and 14: • The Test: Portfolio strategies
Page 15 and 16: Portfolio strategies based on marke
Page 17: • Results (cont’d): Portfolio s
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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