n Investment Analysts Journal - Size, price-to-earnings and beta on the JSE Securities Exchange

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This study investigates the role of beta in explaining stock returns on the JSE Securities Exchange (JSE) both within a univariate framework and in the context of the small size and low price-to-earnings effects. Using a technique similar to Fama and French (1992), simulated portfolios are constructed in each month from July 1990 to June 2000 by ranking stocks on their market capitalisation, price-to-earnings ratios and beta estimates. Examining the resulting time-series means of monthly returns on the portfolios formed in this manner, it is documented that the portfolios containing smaller stocks earn higher returns yet have lower betas. Lower betas are observed for portfolios containing low price-to-earnings stocks. However, they are also found to earn significantly higher average returns than their high price-to-earnings counterparts. It is, thus, inferred that the size and price-to-earnings effects are not proxies for the underlying influence of beta. When portfolios are formed based on beta in isolation, a mild negative relation is observed between beta and average returns. Using two-way sorts it is found that the size and price-earnings effects operate independently of each other. This supports the contention that at least two factors need to be specified in style-based model of expected returns on the JSE. The results of this study present a strong empirical challenge for covariance based models of asset pricing on the JSE.


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