The size effect due to inaccurate measurement of beta

The small firm effect has been a recognized anomaly of modern capital market theory for over a quarter of a century. It stems from the predication that small firms outperform large firms on a risk adjusted basis. The following paper demonstrates that the size effect is not an anomaly, but rather that it is a product of incorrect risk assessment. Specifically, using longer return intervals to measure risk provide for a better explanation of the variation of stock returns across size portfolios. We test monthly and annual betas over two periods and determine that indeed annual betas provide for better a measure of risk of an asset.