*"Portfolio Advice for a Multifactor World", Economic Perspectives, Federal ResereveReserve Bank of Chicago, 1999
As a logical proposition this argument is true. Since expected security returns depend on supply and demand, an increase in the average allocation to small and value stocks will reduce the size and value premiums. The premise of the argument, however, is not consistent with the data. There is no evidence that the portfolio of all US equity mutual funds has become increasingly tilted toward small and value stocks over time. The aggregate portfolio still looks a lot like the market portfolio. (See our "Why Active Investing Is a Negative Sum Game.".)
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