Firm size, book-to-market and expected

Abstract

Investment analysts have long been preoccupied with the idea of predicting future returns based on historic share price performance or company values. To this end, Fama and French (1992) found in their acclaimed study of U.S. markets that for the period 1963 to 1990, market capitalisation (size) and book-to-market (BtM) combined to capture the crosssectional variation in average stock returns. This study was therefore conducted to determine whether size and BtM, independently or combined, are effective in explaining the cross-section of average returns on stocks listed on the JSE Securities Exchange South Africa (JSE) during the period between March 1996 and December 2008. On average, the full-period results indicate that 1) value stocks tend to be three times more profitable than growth stocks per unit of risk; 2) small stocks tend to be twice as profitable per unit of risk as large stocks, but that large stocks outperform small stocks on a valueweighted risk-adjusted basis; and 3) small value portfolios tend to significantly outperform large growth portfolios, with returns that surpass those achieved independently by either small size or high value portfolios