Equity Risk
Taking appropriate risk: the size / value effect.
A second wave of pioneers left the University of Chicago inspired by the teachings of Fama. They had concluded that the market in some instances rewarded extra risk: over time, it favored smaller companies and cheaper stocks.
After decades of testing historical stock and bond prices going back to 1926, Professors Fama and French concluded that common stock investors were rewarded for investing in small stocks and lower priced ones. These effects have been observed for nearly a century and in markets around the world, but do not occur in every time period.
The chart below illustrates the size and value effects. Notice the dramatic increase in annualized return when moving from growth to neutral to value stocks and as stocks decrease from large to small.
Source: Dimensional Fund Advisors
Portfolio Composition:
| US Large Stocks | Fama/French US Large Cap Index | |
| US Large Growth Stocks | Fama/French US Large Growth Index (ex utilities) | |
| US Large Value Stocks | Fama/French US Large Value Index (ex utilities) | |
| US Small Stocks | Fama/French US Small Cap Index | |
| US Small Growth Stocks | Fama/French US Small Growth Index (ex utilities) | |
| US Small Value Stocks | Fama/French US Small Value Index (ex utilities) |
The size and value effect led David Booth and Rex Sinquefield to found Dimensional Fund Advisors (DFA)
in a Brooklyn apartment in 1981. Since then it has grown into a $150 billion asset management firm.
Please note that investors can’t invest directly in indices and that they do not reflect deduction of fees and other investment costs so they don’t reflect what an actual investor in a managed account would have received.