The AAII Beginner's Portfolio: An Annual Performance Review
by James B. Cloonan
First, we wanted to test in practice the historically simulated results that showed that, on average, the smaller the capitalization of a companys stock, the higher would be the return over the long run; and, the lower the ratio of a companys stock price to its book value per share, the higher the long-run return. There has been considerable research showing that smaller capitalization stocks provide higher returns, and the excess returns are more than might be explained by any additional risk. Two well-known researchers confirmed this result and also showed that the lower the price-to-book-value ratio, the higher the return.
Second, we wanted to examine and share with our members the real-world problems of dealing with a portfolio of smaller-company stocks.
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