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Northern Exposure: How Canadian Small Stock Investments Can Benefit Investors

We investigate the extent to which investors can benefit from investing in small market capitalization Canadian stocks. Using monthly data from 1950 to 2009, we show that the size effect has not lessened over the decades in Canada, despite earlier evidence to the contrary in the U.S. We show that with their low correlation to large stocks, Canadian small stocks represent a unique asset class, and as such a U.S. investor who included a portion of Canadian small stocks would have had a much better return-to-risk reward than from including stocks from nine developed equity markets. Based on daily trading volume, we examine and discuss important investabilty issues overlooked in most similar studies. Finally, we corroborate U.S. findings that highlight the importance of returns in January in explaining the bulk of the size effect and examine the size effect in a variety of economic conditions and crises. JEL Codes: G11, G12, G14