Fama and French (1992) studied "The Cross-Section of Expected Stock Returns" and found that size (ME) and book-to-market equity (BE/ME) capture average stock returns. They analyzed approximately 2,267 NYSE, AMEX, and NASDAQ stocks per month from July 1963 to December 1990. The highest BE/ME portfolio returned 1.83% per month; the lowest returned 0.30% — a spread of 1.53% per month. Market beta's univariate slope was 0.15% per month (t = 0.46) — not reliably different from zero.
What the Study Found
The average FM slope on ln(BE/ME) alone was 0.50% per month (t = 5.71). The average FM slope on ln(ME) alone was -0.15% per month (t = -2.58). In the bivariate regression, the BE/ME slope was 0.35% per month (t = 4.44). The size slope was -0.11% per month (t = -1.99). The size-return spread was 0.74% per month (1.64% vs. 0.90%). Within size deciles, the BE/ME spread averaged 0.99% per month (1.63% vs. 0.64%).
Methodology
The study used CRSP and COMPUSTAT data for all non-financial NYSE, AMEX, and NASDAQ stocks. The sample averaged approximately 2,267 stocks per month across 330 monthly observations from July 1963 to December 1990. Monthly Fama-MacBeth regressions used beta, ln(ME), ln(BE/ME), ln(A/ME), ln(A/BE), and E/P as explanatory variables. Post-ranking betas from 100 size-beta portfolios were assigned to individual stocks to reduce measurement error.
Key Statistics
| Metric | Finding | Context |
|---|---|---|
| BE/ME return spread | 1.53% per month | Highest BE/ME (1.83%) vs. lowest (0.30%); 1963-1990 |
| Size return spread | 0.74% per month | Smallest ME (1.64%) vs. largest (0.90%); 1963-1990 |
| FM slope on ln(BE/ME) alone | 0.50%/mo (t = 5.71) | Univariate regression; 1963-1990 |
| FM slope on ln(ME) alone | -0.15%/mo (t = -2.58) | Univariate regression; 1963-1990 |
| FM slope on beta alone | 0.15%/mo (t = 0.46) | Not reliably different from zero; 1963-1990 |
| FM slope on beta with size | -0.37%/mo (t = -1.21) | beta adds no power once size is included |
| FM slope on ln(BE/ME) with size | 0.35%/mo (t = 4.44) | Bivariate regression with ln(ME); 1963-1990 |
| Within-decile BE/ME spread | 0.99% per month | Average across size deciles (1.63% - 0.64%); Table V |
| ln(BE/ME) = ln(A/ME) - ln(A/BE) | Identity | BE/ME captures difference between market and book leverage |
Why This Matters
Beta-based portfolio evaluation underweights size and value exposures. Strategies targeting small-cap or high-BE/ME stocks embed measurable risk premia that beta alone does not capture. Factor-based benchmarking — using size- and BE/ME-matched benchmarks rather than broad indices — follows directly from this framework.