What are small cap stocks?
What are value stocks?
Should I invest in small company and value company stocks?
In 1990, the Nobel Memorial Prize in Economic Sciences was awarded to Professor William Forsyth Sharpe for his groundbreaking research on the relationship between risk and return. One of the originators of the Capital Asset Pricing Model (CAPM), Sharpe taught that “the risk that is rewarded with higher expected return is generally risk associated with doing badly in bad times.” In other words, the higher the risk, the higher the expected returns should be.
In 1992, Professors Eugene Fama Sr. and Ken French published a groundbreaking academic paper on “The Cross Section of Expected Stock Returns” that expanded the CAPM into a “Three Factor Model.”
Fama and French concluded that there are three risk factor premiums that have historically rewarded investors with higher returns: stocks over bonds (CAPM), small stocks over large, and value stocks over growth. There are risks associated with investing in stocks and overweighting small company and value stocks that investors should carefully consider. Additionally, investors with time horizons of less than five years should consider minimizing or avoiding investing in common stocks.
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