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A portfolio of firms with below-median market capitalizations (Small) has a monthly return that is 0.23% higher than a portfolio of firms with above-median market
A portfolio of firms with below-median market capitalizations (Small) has a monthly return that is 0.23% higher than a portfolio of firms with above-median market capitalizations (Big). Optimers main competitor invests by short-selling the Big portfolio and using the proceeds to buy the Small portfolio, earning the monthly return of 0.23%. Optimer conducts its own propriety stock return research. It sorts firms by both size and BE/ME, and calculates the following historical monthly returns: | | High | Medium | Low | |:------------|:--------:|:-------:|:-------:| |Small |1.26% |1.03% |0.38% | |Big |1.1% |0.68% |0.18% | Explain how Optimer can use this information to outperform its competitor, and how much higher its monthly return will be. Is this extra return a premium for taking on more risk exposure, or does it represent alpha
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