The Morningstar Equity Style Box

How it all works.

Morningstar Canada 3 May, 2004 | 3:43AM
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Step 1: Geographic zones: Each stock in a portfolio is grouped into one of seven geographic zones. The seven zones are: Canada, the United States, Latin America, Europe, Japan, Asia ex-Japan and Australia/New Zealand. This helps to ensure that the size and style assignments are relevant to local investors everywhere, including in Canada.

Step 2: Market capitalization: Within each of the geographic zones, we determine whether a security is small-cap, mid-cap or large-cap. The market-cap thresholds are based on the cumulative value of all the stocks within a given zone, rather than a market index.

Companies whose capitalizations are within the largest 70% of their style zone are considered large caps. Those whose market caps are in the next 20% are considered mid-caps, and the rest are considered small caps. Individual stocks are then assigned size scores that typically range from minus 100 (micro-cap) to 400 (giant-cap) based on where they fall in the size spectrum. This lets us differentiate between, for instance, big mid-caps and mid-caps verging on small-cap territory.

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