McGraw-Hill

272 Managing Portfolios
TABLE 10-2
Percentage Standard Deviations of Monthly Returns to Size-
Related Attributes-l 978-1 994.
Attribute NaTve Pure
Small-cap 0.85 0.58
Neglect 0.87 0.69
Low price 1.04 0.58
*All dmerences between nab and pure rebuma devlsllons am 8IgnlRcarn at me 1 pew hl.
Second, the returns in Figure 10-4 display much less volatility
than those in Figure 10-3. While the returns in Figure 10-3 plot a general
up/down/up pattern (corresponding to eras favoring small-cap
large-cap, and then sd-cap stocks), they show much month-tomonth
volatility within these trends. By contrast, the results in Figure
10-4 appear to be much smoother and more consistent.
The latter impression is verified by a look at Table 10-2, which
presents monthly standard deviations for both naYve and pure returns
to the size-related attributes; All the pure return series exh
significantly less volatility?
Implications
The use of pure returns rather than nake returns to equity attributes
can help investors avoid some investment pitfalls and can
highlight more investment opportunities.
Value modeling, for example, often considers price/eamings r
tios and dividend yields. The ndive returns to low P/E and to high
yield suggest the two are highly correlated (0.47 correlation over the
1978 to 1994 period). The pure retums display little correlation, however
(0.07). Similarly, the growth stock investor would do well dis- to
tinguish between historical and sustainable growth measures; the
pure returns to these attributes are negatively correlated (-0.13), although
their ndive returns are fairly highly correlated (0.56).
Investors may look to value stocks in unsettled or bearish
kets. But what value attributes should they use? DDM value? Divi-