The size effect reveals that stocks with a ________ book-to-market ratio have ________ alphas.

Question

Quizplus · Accepted Answer

The size effect refers to the empirical fact that smaller firms tend to have higher risk-adjusted returns than larger ones. However, within each size category, stocks with a high book-to-market ratio tend to have higher alphas than those with a low book-to-market ratio. This effect is known as the value effect or the HML factor. Therefore, stocks with a high book-to-market ratio, which are typically value stocks, have positive alphas.

The Size Effect Reveals That Stocks with a ________ Book-To-Market