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Keywords:

  • Size;
  • Value;
  • Risk;
  • Liquidity
  • G11;
  • G12

Abstract

This study investigates whether passive investment managers can exploit the size and value premia without incurring prohibitive transaction costs or being exposed to substantial tracking error risk. Returns on the value premium are shown to be pervasive across size groups, while the size premium is nonlinear and driven by microcaps. The value premium cannot be explained by the capital asset pricing model; however, returns on value portfolios do covary across monetary regimes. The substantial turnover required to achieve annual rebalancing and the relative illiquidity of Australian small-cap firms means that investing in a portfolio of large-cap value firms appears to be the best way for passive fund managers to exploit the Fama and French (1993) premia.