The small-firm effect refers to the observation that small firms' stocks
A) follow a random walk but large firms' stocks do not.
B) have earned abnormally low returns given their greater risk.
C) have earned abnormally high returns even taking into account their greater risk.
D) sell for lower prices than do large firms' stocks.

Question

Quizplus · Accepted Answer

The small-firm effect refers to the tendency of small firms to earn higher returns than large firms, even after accounting for their higher risk. Therefore, option (C) is the correct answer. Option (B) is incorrect because it states that small firms earn abnormally low returns, which is not true. Option (A) is incorrect because it suggests that large firms' stocks do not follow a random walk, which is not supported by evidence. Option (D) is incorrect because small firms' stocks may sell at either lower or higher prices than large firms' stocks.

The Small-Firm Effect Refers to the Observation That Small Firms