PORTFOLIO PERFORMANCE AND THE INTERACTION BETWEEN SYSTEMATIC RISK, FIRM SIZE AND PRICE‐EARNINGS RATIO: THE CANADIAN EVIDENCE

While some American studies relate portfolio performance to P/E ratios, others reject such a hypothesis or find evidence of a confounded P/E‐size effect. This prevents conclusive inferences. Canadian markets are structurally different from American ones; thus American evidence may not apply to Canadian stocks. This study examines how interaction between P/E ratio, beta and firm size affects the portfolio performance of Canadian stocks. The results show a relative support for the firm size effect, even after proper adjustment for risk and alternate change in control variables. This evidence is not uniform across different quarters of the year but not restricted to year‐end effect. The findings also demonstrate a positive correlation among the three variables. However, one cannot generalize conclusions since the analysis may not capture all other pertinent factors.