Firm size and book‐to‐market equity as risk proxy in investment decisions

This study investigates the economic content of the two firm‐specific characteristics, size and book‐to‐market equity. Size is found to be significantly related to a combination of betas on all of the macro variables proposed in this research. Its significance persists through out the entire sample period. This provides further evidence that size is a proxy for pervasive risk factors in the stock market. The support for book‐to‐market equity’s role as a risk proxy is also evidenced, however to a lesser extent. Securities are then sorted into size and book‐to‐market equity portfolios and their effects on investment decisions are examined in the context of macro variables. Important investment implications are drawn based on the findings.