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Q&A: Narrowly Held Risks

Tue, 28 Nov 2017 10:28:38 GMT

John Cochrane* has suggested that the historical premiums for small cap and value stocks reflect "narrowly held risks" and that these premiums are likely to shrink in the future "until the markets have reached equilibrium, in which every investor has bought as much risk as he likes." Do you agree, and, if so, what are the implications for investors considering a small cap or value tilt in their portfolios? *"Portfolio Advice for a Multifactor World", Economic Perspectives, Federal ResereveReserve Bank of Chicago, 1999 EFF/KRF: Cochrane offers this notion of narrowly held risks as one of several explanations for the size and value premiums. The premise is that until the last couple of decades, individual investors had limited access to diversified portfolios of small stocks and value stocks. As a result, the prices of small and value stocks were lower than they would be if all investors had easy access, and their expected returns were higher. The introduction and growth of mutual funds that invest in small-cap and value stocks would then reduce the expected returns on these securities. (Read the full entry)