You Have Just Completed a Study of Small and Large

question 45

Essay

You have just completed a study of small and large stocks and have obtained the following results:
s $\begin{array} { l c c } & \text { small stocks } & \text { large stocks } \\\text { excess returns } & 5 \% & 0 \% \\\text { transactions cost } & 10 \% & 2 \%\end{array}$

Given the difference in transactions costs,how long would your investment horizon have to be for small stocks to be a better investment than large stocks?

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Definitions:

Period Cost

Expenses that are not directly tied to the production of goods or services and are expensed in the period they are incurred.

Target Net Income

The desired profit a company aims to achieve for a period, used in budgeting and planning processes.

Required Sales

The amount of sales needed to achieve a specific financial goal, such as breaking even or reaching a profit target.

Contribution Margin Ratio

The percentage of each sales dollar remaining after variable costs are subtracted, available to cover fixed costs and provide profit.