Don’t compare Apples to Oranges: Why do portfolio construction details matter?
Background When Banz (1981) wrote about the size premium in his Ph.D. Dissertation, it was “the” news, at least in the academic community. Soon, after that practitioners followed as well. A range of small-cap funds started to appear on the street promoting their strategy. Fast forward to the present time, there are thousands of different variations of the small-cap funds around the global markets. The size factor was indeed the first anomaly to be discovered. The research by Banz (1981) started kind of a revolution in the academic finance community in that there was a sudden surge of motivation among researchers to look harder into the CRSP database (this was and is still is the go-to database for security price data) and try to find factors that would potentially explain the cross-section of expected returns. After Fama and French (1992) decided to include size and value along with the market factor in their seminal paper thereby introducing the three-factor model, the size along wit