Portfolio Performance and the Interaction Between Systematic Risk, Firm Size and Price‐earnings Ratio: The Canadian Evidence

Abstract

While some American studies relate portfolio performance to PIE ratios, others reject such a hypothesis orfind evidence ofa confounded PIE-size effect. This prevents conclusive inferences. Canadian markets are structurally differentfrom American ones; thus American evidence may not apply to Canadian stocks. This study examines how interaction between PIE ratio, beta and firm size affects the portfolio performance of Canadian stocks. The results show a relative support for the firm size effect, even after proper adjustment for risk and alternate change in control variables. This evidence is not uniform across different quarters of the year but not restricted to year-end effect. The findings also demonstrate a positive correlation among the three variables. However, one cannot generalize conclusions since the analysis may not capture all other pertinent factors.

Behavior of Stock Price Variability over Trading and Nontrading Periods, and Daily Return Volatility

“…Chan and Nai (1991) argue that small-sized firms have bigger risks than big-sized firms. Elfakhani (1991) concludes that variability tends to happen more frequently in small-sized firms because of the lack of information. Small-sized firms should present higher volatility than the big ones.…”

Small Firm and Value Effects in the Canadian Stock Market

“…our results distinguish size effects in Canada from market beta and book-to-market effects. Other related studies that examine Canadian stock markets include Athanassakos (1992) and Elfakhani (1993). The focus and methodology of these studies are different from ours.…”