The size effect/premium in stock returns is the phenomenon that small-cap stocks on average outperform large-cap stocks over time. Therefore, the size premium can be inferred by the portfolio return difference between a small-sized and a large-sized portfolio (i.e. small minus big).
In this assignment, you will evaluate the performance of the size premium across the globe. Professor Kenneth French is one of the authors of Fama and French’s (1993) three-factor model that incorporates a size premium.
In his data library, he has shared historical returns for various asset classes and portfolios, including the size premiums. In the Excel file titled ‘Size premiums across regions’ attached to this assignment on Canvas, you can download the monthly size premiums across six regions/countries:
1) Developed
2) Emerging
3) Europe
4) Japan
5) Asia-Pacific Excluding Japan
6) North America
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That is, the number in each cell indicates the monthly size premium for that particular country/region. You are also given the global market monthly premium named ‘Global Market’. Based on the Excel spreadsheet indicated above, perform the following tasks.
1) Calculate the time-series average returns and standard deviations to the size premiums across the six regions/countries. You should also consider the reward to risk ratios calculated as premiums divided by standard deviation. Over the sample period and regions/countries considered, do you think that size matters in investment strategy?
2) Compare the performance of these size premiums with the global market premium over the same period. Do they outperform or underperform the market?
3) Examine the time-series return pattern of these size premiums. Are there any specific periods in which the size premiums outperform or underperform? Based on the time-series return pattern, do you think market condition (e.g. boom or recession) plays a role in explaining the
return variation for the size premiums?
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