The size factor matters for actual portfolios
It may not have a high return alone, but it gives important diversification benefits
THE size factor – the observation that small- and medium-cap stocks tend to outperform large-caps – is among those equity risk factors that have provided a premium over the longer term. Recently, however, some researchers have expressed doubt about its utility based on a comparison of its performance with other well-known factors.
For example, Ron Alquist, Ronen Israel and Tobias Moskowitz as well as Noah Beck, Jason Hsu, Vitali Kalesnik and Helge Kostka have argued that there is neither strong empirical evidence nor robust theoretical support for a persistent size premium.
But there are reasons why most investors should question the relevance of these conclusions.
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