|
|
|
No free lunch for me.
Trebor
07-07-2007, 6:09 AM | Post #2409299
| 0 |
  |
|
"Second, size and value are unique/independent risk factors with very low correlation to market and each other. That provides diversification benefit."
At some amount of small, value, and beta the market will prove to be optimally diversified. We only know this amount in retrospect. Since you generally believe the markets are efficient enough, why do you believe the market does not have the best guess now? Why does the market have the wrong exposure to various risk factors? Fama's research is not a secret.
"You then subtract risk by lowering beta to get back to same starting point in terms of total risk and expected return--but less dispersion."
You are trading one RISK for another theoretical RISK with the hope that one is better than the other. In the end we can only define them with four letters, RISK. If you need less equity exposure, then clearly you can lose less money by having a lower equity exposure. If you need equity exposure and are counting on a small value RISK premium to make up for your lower allocation, then clearly you may not reach your goal.
From a theoretical standpoint this strategy implies to me the market must be micro efficient and macro inefficient to work. (A variation of "Samuelson's dictum" as advocated by Robert Shiller) The market has the best guess when it comes to individual securities, but when it comes to nine style boxes, the market leaves money on the table with small value. (A strategy can be devised with the same risk/return but with less dispersion) In the end, this is what the small value camp must believe in my opinion. Think about it. Does anyone here recommend overweighting small growth? Why not?
We talk about small value risk, but does anyone on this board "really" believe in it? Not enough do in my opinion. In fact, I hear how small value has "bubble protection".a concept which sounds entirely different than risk.
For me, I just don't believe in lingering free lunches. I surely don't believe they are easy to find. I may believe in it more than the people who helped me to learn it. (smile)
Trebor.
Originally posted in thread: 59564
Topics
Beta
correlation
Gene Fama
risk premium
small value
View Complete Thread
|
|
|
