What Cost “Noise”?

Robert D. Arnott

Financial Analysts Journal, 2005, vol. 61, issue 2, 10-14

Abstract: We have no way of knowing “true fair value” for any asset because we cannot see all future cash flows. But few would dispute that market prices differ wildly from the ultimate true fair value. The implications for capitalization-weighted indexes are profound. If market capitalization is equal to true fair value, plus or minus a large error term, then the largest-cap stocks will predominantly be those with a large true fair value and a positive error term. History supports this view: The largest-cap stocks underperform the average stock with some regularity—and by a startlingly large margin.

Date: 2005
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DOI: 10.2469/faj.v61.n2.2706

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