FIN30016 Assignment 1 - Does size matter?

 Assignment 1: Does size matter? Evaluating the risk and return of size premiums. 

The size effect/premium in stock returns is the phenomenon that small-cap stocks on average  outperform large-cap stocks over time. Therefore, the size premium can be inferred by the  portfolio return difference between a small-sized and a large-sized portfolio (i.e. small minus  big). In this assignment, you will evaluate the performance of the size premium across the  globe. Professor Kenneth French is one of the authors in Fama and French's (1993) three-factor  model that incorporates a size premium. In his data library, he has shared historical returns for  various asset classes and portfolios, including the size premiums. In the Excel file titled ‘Size  premiums across regions’ attached to this assignment on Canvas, you are able to download the  monthly size premiums across six regions/countries: 

1) Developed 

2) Emerging 

3) Europe 

4) Japan 

5) Asia-Pacific Excluding Japan 

6) North America 

That is, the number in each cell indicates the monthly size premium for that particular  country/region. You are also given the global market monthly premium named ‘Global Market’.  Based on the Excel spreadsheet indicated above, perform the following tasks. You are  encouraged to use Excel to perform the analyses. However, your analyses and discussion of  findings must be presented as a report in a Word/PDF format. The word limit for the report is  1500 words excluding Executive Summary, Table of Contents, Tables, Figures, and References. 

1) Calculate the time-series average returns and standard deviations to the size premiums across the six regions/countries. You should also consider the reward to risk ratios calculated as  premium divided by standard deviation. Over the sample period and regions/countries  considered, do you think that size matters in investment strategy? (20 marks) 

2) Compare the performance of these size premiums with the global market premium over the  same period. Do they outperform or underperform the market? (5 marks) 

3) Examine the time-series return pattern of these size premiums. Are there any specific periods  in which the size premiums outperform or underperform? Based on the time-series return  pattern, do you think market condition (e.g. boom or recession) plays a role in explaining the  return variation for the size premiums? (20 marks) 

4) Conduct some literature review on academic articles on the size premiums. Based on your  review, identify two potential theories/reasons why small firms may outperform large firms.  Also, review the findings on past literature conducted on size premiums in the regions/countries  above. Is your finding consistent with the extant literature? (35 marks) 

6) Structure and presentation of the report including referencing. (10 marks) 7) Writing style and grammar. (10 marks)

Dr Mardy Chiah FIN30016 21S2