Over the years, investors and academics have noted that small market capitalization stocks and value stocks have tended to outperform the broader market.  This outperformance has been observed over long periods of time in both U.S. and international stock markets.

The plot below utilizes data on 25 portfolios formed by sorting stocks on both size (market capitalization) and value (book to market ratio) characteristics to illustrate the magnitude of these effects in the United States.  The historical return data used to generate these plots was compiled by Eugene Fama and Kenneth French, and the data is available at Kenneth French’s website.  The z-axis of the plot shows the geometric average of the monthly returns for each of these 25 portfolios over the past 78 years.


Continue reading »