Investments, tenth edition

mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.     

bod61671_ch11_349-387.indd   367

bod61671_ch11_349-387.indd   367

7/17/13   3:41 PM

7/17/13   3:41 PM

Final PDF to printer

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368 

P A R T   I I I

  Equilibrium in Capital Markets

But even when returns are adjusted for risk using the CAPM, there is still a consistent pre-

mium for the smaller-sized portfolios.

  

 Imagine earning a premium of this size on a billion-dollar portfolio. Yet it is remarkable 

that following a simple (even simplistic) rule such as “invest in low-capitalization stocks” 

should enable an investor to earn excess returns. After all, any investor can measure firm 

size at little cost. One would not expect such minimal effort to yield such large rewards. 

 Later studies (Keim,  

24

    Reinganum,  

25

   and Blume and Stambaugh  

26

  ) showed that the 

small-firm effect is concentrated in January, in fact, in the first 2 weeks of January. The 

size effect is largely a “small-firm-in-January” effect.