Scientific Beta

In an article published on the CFA Institute's Enterprising Investor forum, Joseph Simonian, PhD, Senior Investment Strategist at Scientific Beta, looks at whether the Size factor adds value to an investor's portfolio.

In an article published on the CFA Institute's Enterprising Investor forum on 1 March, 2023, Joseph Simonian, PhD, Senior Investment Strategist at Scientific Beta, looks at whether the Size factor adds value to an investor's portfolio.

Work previously published in The Journal of Beta Investment Strategies by Scientific Beta researchers Mikheil Esakia, Felix Goltz, Ben Luyten, and Marcel Sibbe, conducted several tests to determine whether the Size factor does indeed improve the Sharpe ratio of a multi-factor investor. The results illustrated that it clearly does and are consistent with findings from other researchers. 

When a portfolio’s exposures to factors other than the market factor are taken into account, adding the Size factor clearly improves the portfolio’s risk/return characteristics. Size is a strong diversifier of other traditional factors and consequently adds value to a multi-factor portfolio. Analysis that doesn’t consider exposures to Momentum, Profitability, and other factors is of little use to investors.

Finally, there is a Size effect. Claiming otherwise contradicts the various academic asset pricing models that show the Size factor adds explanatory power in the cross-section of returns. These models, by including factors other than the market, provide meaningful conclusions for investors and bear out the Size factor’s important contribution to portfolio diversification and risk control.

CFA Institute's Enterprising Investor is a forum for provocative and useful analysis of current issues in finance and investing.