Firm characteristics predict stock returns, revolutionizing investment strategies.
The article explores how firm size and book-to-market ratio can predict stock returns by being linked to the true market beta of returns. Even after considering market beta, these characteristics still play a role in explaining stock returns. The study suggests that size and book-to-market can coexist with a single-factor model in predicting stock returns. The research also sheds light on the relationship between business cycle properties and firm characteristics in determining stock returns.