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Trump’s not the cause of U.S.-China tensions—but rather an accelerant
Rather than some of the posturing we’ve seen in its interactions with allies, the U.S. administration has demonstrated a genuine strategic effort to crimp and control the future trajectory of China and its practices concerning technology, especially artificial intelligence, cybersecurity, and intellectual property. Watch to see how developments are likely to unfold from here.
Understanding the performance of small-cap stocks
Historically, small-cap stocks have had higher average returns than large-cap stocks; however, this size premium hasn’t appeared across all small caps. In this paper, we analyze stock return data going back to the 1920s and the returns of different segments of the small-cap universe to better understand the returns of small-cap relative to large-cap stocks.
Small-cap stocks play an important role in a well-diversified portfolio.
When implementing investment strategies, it’s important to account for the interaction between different premiums, including size, value, and profitability.
A consistent focus on known dimensions of expected return, including the size premium, can increase the likelihood of capturing premiums on a daily basis.
A range of expected returns
Different stocks generally don’t have the same expected return. For example, some investors may see some stocks as having greater risk than others and, in turn, demand a higher expected return to be compensated for the perceived risk. Others may express a preference for stocks that meet criteria specific to their personal goals and, consequently, expect a distinct return profile from such investments. But if there’s a range in expected returns across stocks, how can we reliably identify the differences?
Using market prices to identify differences in expected returns
A stock’s current price reflects information about future cash flows discounted by the expected stock return: A higher expected return implies a lower stock price. Two price metrics have been shown to contain reliable information about differences in expected returns: company size, defined as price times shares outstanding, and relative price, defined as price scaled by a fundamental accounting variable, such as book value. Numerous studies, using data covering over 40 countries and spanning close to a century, show that these price variables, combined with cash flow variables such as profitability,¹ contain reliable information about the cross-section of expected stock returns.