Can We Really Combine Value And Growth Large And Small To Get A Portfolio That Is Style/Size Neutral, And Still Deliver Alpha?
- Topics:
- Commercial Lending
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Overview: A common approach in overall fund construction is to be neutral with respect to size and value effects. This article looks at the returns of small/large cap stocks and value/growth stocks in the U.S. and International markets. Given the systematic premiums that are associated with small cap and value stocks, it makes sense to have an overall bias toward the risk factors in order to have expected returns higher than the market average. The expected return on the market reflects the weighted average cost of capital of all companies. It is very well known that small cap and value companies have higher costs of capital than large cap and growth companies respectively and this is reflected in their average stock returns over the long-run. Shifting the overall exposure of a fund toward value and small cap stocks allows the capital markets to do some of the work for one in generating higher returns.
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Format: PDF | Size: 418KB | Date: Jan 2002 | Pages: 8
