Title: Characteristics or Covariances?

Co-author: Sheridan Titman, University of Texas, Austin

Status: Published, Journal of Portfolio Management, 24(4), Summer 1998, p. 24-33.

Date of Last Revision: June 3, 1998


Recent research has shown that small market capitalization and high book-to-market (value) stocks earn considerably higher average returns than the corresponding large stocks and low book-to-market (growth) stocks. Although there exist risk or factor-based explanations for this return differential, our empirical research instead supports a "characteristics model" in which expected returns are not linked to common variation in the returns. As we discuss in this paper, these empirical results have important implications for performance evaluation and portfolio management.

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