00Thaler_FM i-xxvi.qxd

not due to either momentum or liquidity. Indeed, the portfolios with the
lowest factor loadings seem to have the highest turnover, suggesting that if
liquidity does have an effect on returns, it would bias our results toward
finding a relation between factor loadings and returns. In addition, there
does not seem to be any noticeable relation between past returns and factor
loadings.

5.Conclusions

The analysis in this chapter demonstrates two things: First, we show that
there is no evidence of a separate distress factor. Most of the comovement
of high B/M stocks is not due to distressed stocks being exposed to a unique
“distress” factor, but rather, because stocks with similar factor sensitivities
tend to become distressed at the same time. Second, our evidence suggests that
it is characteristics rather than factor loadings that determine expected re-
turns. We show that factor loadings do not explain the high returns associated

346 DANIEL AND TITMAN

Table 9.10

Mean Past 12-Month Return of Test Portfolios

Portfolios are formed based on size, book-to-market and preformation HML factor
loadings. At each yearly formation date, the average past 12-month return for each
portfolio was calculated using value weighting:

The last column is the difference between the factor-loading portfolios 5 and 1.

Char Port Factor Loading Portfolio

B/M SZ 1 2 3 4 5 5–1

11 1.74 1.83 1.79 1.77 1.50 −0.24
12 2.59 2.15 1.79 1.88 1.93 −0.66
13 1.88 1.62 1.41 1.40 1.52 −0.36

21 1.25 1.31 1.17 1.15 1.24 −0.02
22 1.30 1.17 1.12 1.26 1.37 0.06
23 1.09 1.26 1.03 1.08 1.25 0.17

31 0.87 0.96 0.90 0.84 0.61 −0.26
32 0.97 1.01 0.96 1.04 0.89 −0.08
33 0.85 1.02 1.23 1.14 1.09 0.24

Average 1.39 1.37 1.27 1.28 1.27 −0.13

rrirtr

iit

it it t

i

−− 12 =⋅∑ − 11

1

,

,

ΣME ME,, ,.