Abstract
After adjusting for transaction costs and different rebalancing periods, portfolios of securities selected on the basis of the issuing firm's book-to-market-equity (BE/ME) ratio and size can produce returns superior to those of the the market. Specifically, after adjusting for 1.0 percent transaction costs and annual rebalancing, investors would have outperformed the market by 4.82 percent over the 1963–88 period if they had invested in securities from firms with high BE/MEs and small size. The optimal rebalancing period for long positions in these securities is two years, and the optimal period for portfolios that use the proceeds from short positions in firms with low BE/MEs and large size to purchase firms with high BE/MEs and small size is four years.
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