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Anomalies are unexplained empirical/research findings that contradict the Efficient Market Hypothesis. Required: What evidence has been...

Anomalies are unexplained empirical/research findings that contradict the Efficient Market Hypothesis.

Required:

What evidence has been found regarding the Size Effect and the Book-to-Market Ratio? Does this evidence support the Efficient Market Hypothesis? Discuss.

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Answer #1

There are in generall 3 widely accepted anomalies of Efficient Market Hypothesis (EMH). They are the

  • Size effect
  • Valuation effect and
  • Momentum effect

Evidence that has been found regarding the Size Effect:

  • Despite adjusting for their higher risks, stocks with smaller market capitalizations have historically outperformed stocks with large market capitalizations

Evidence that has been found regarding the Book-to-Market Ratio

  • Stocks with lower Price-to-Book multiples (Or higher book-to-Market multiples) have historically outperformed those with higher Price-to-Book multiples (Or lower book-to-Market multiples)

These evidence do not support EMH. They are contrary to EMH.

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