With Size, Does Risk–>Return?

December 15, 2011

(This article was first published on Timely Portfolio, and kindly contributed to R-bloggers)

A basic tenet in finance is that higher risk should lead to higher return as the time horizon stretches to infinity.  However, in bonds, higher risk has not meant higher return with either credit risk (high-yield) or long duration risk (maturity > 15 years).  Based on some quick analysis of Kenneth French’s dataset on returns by market capitalization, it appears theory might better explain reality but not in a linear fashion.  For those more interested in risk and return on small caps, see this fascinating revelation refuting a basic tenet of finance About That Small Cap Effect: Oops!

From TimelyPortfolio
From TimelyPortfolio
From TimelyPortfolio

R code from GIST:

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