According to Nobel Laureate Eugene Fama,there are three major risk premiums.
1. Equity premium is the additional “wage” one can earn from taking stock market risk over not taking stock market risk.
2. Small cap premium is the additional “wage” one can earn from taking small company risk over taking large company risk.
Since its inception on March 9, 2003, RSP has returned 193%. At the same time, SPY has only returned 97%. This is extremely puzzling as both RSP and SPY hold the same S&P 500 stocks.The only difference is that SPY is a cap-weighted fund and RSP is an equally-weighted one. This begs the question, is RSP’s outperformance normal; and more importantly, is it likely to continue?
To answer the question I asked my intern Nahae Kim to run a regression based on the