Results beta and size because size and betas are

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RESULTS Beta and size: Because size and betas are highly correlated tests lack the power to separate size and beta effects in average returns When portfolios are sorted according to size: - STONG negative relationship between size and avg. return - STRONG positive relationship between avg return and beta (supports CAPM) Each size decile is divided into portfolios on the basis of betas for individual stocks (pre-ranking betas). Now the variation in beta is unrelated to size. When portfolios are sorted according to betas: - No relationship between avg. returns and beta - Therefore, the variation in beta (unrelated to size) is not compensated in avg. returns There is a strong negative relationship between size and average returns; however there is no relationship between avg. returns and beta (refuting CAPM) Leverage: Two ways of reading leverage 1. Relative distress (BE/ME) 2. Involuntary leverage effect (market leverage & book leverage)
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