OK, this is getting way too hand-wavy for me.vanbogle59 wrote: ↑Fri Jan 21, 2022 8:23 pmNo, you have no exposure to SCV by holding TSM because in addition to SCV companies you are also holding the antithesis to SCV, which is LCG, as well as SCG, LCV, etc.willthrill81 wrote: ↑Fri Jan 21, 2022 5:09 pm Can we capture the SCV premium by holding a total market index, or is it just that relative to the weighting of large caps in the index it would be barely noticeable? Dumb question that I should probably know, what is the reason that SCV is a non diversifiable risk factor?
I don't know quite what you mean by your last question.
It is nonsensical to say that you have no exposure to stuff you own.
That can only be asserted in the view that SCV is a thing and the actual companies are not things.
I accept that the Factor model shows no deviation if all you own is TSM. But the model can't come first, the actual stocks have to have epistemological priority.
So, of course owners of TSM are exposed to SCV stocks (albeit very little).
But the model attempting to describe the behavior of a TSM portfolio cannot invoke the SCV factor if the composition of the portfolio is pure market weight.
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Right, owning SCV companies doesn’t mean you load on the HmL and SmB factors, because in the total market you also own SCG. You cancel out the SCV because the market is only the market.
Allocating such that you load on the HmL and SmB factors is asking “how much MORE than the market do you hold in small and value companies?” Thus to get the risk premium you need to over-allocate with respect to the market. TSM holds SCV companies, but by definition doesn’t hold more than the SCV in the total market