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In investing, a style box is a graphic representation of the investing style of a stock or mutual fund, or a fixed-income investment such as a bond. There are two style boxes — One is used for equities, which are stocks and mutual funds, while the other is used for fixed income investments, or bonds. By noting its placement in the style box, an investor can determine the investment style of the particular investment.
The equity style box is a three-by-three matrix. Along the bottom of the box are three categories of investment styles: Value, blend and growth. Along the side of the box are three sizes of companies: Large, medium, and small, or large-cap, mid-cap, and small-cap. A large-cap value fund would have a black square in the upper left corner of the box, in the box that represents the intersection of the large row and the value column. A mid-cap growth fund would be indicated by a black box at the intersection of the medium size row and the growth column.
The fixed-income style box, used for bonds and bond funds, is also a three-by-three matrix. The columns represent three durations of fixed-income investments: Short, interim, and long. The rows represent quality: High, medium, and low. A low-quality short-term bond fund would be indicated by a black box in the lower left corner of the box, at the intersection of the short column and the low-quality row. A bond with a interim maturity that is high-quality would be indicated by a box at the intersection of the interim column and the high quality row.
An international equity style box looks the same as the equity style box. The difference is in the way that the capitalization assignations are made. Morningstar, the investment research company that invented the style box, divides its stock database into thirds to determine the size ratings of U.S. stocks. International stocks are considered small cap if their market capitalization is less than $1 billion U.S. dollars (USD), mid cap if the market capitalization is between $1 billion USD and $5 billion USD and large cap if the market capitalization is over $5 billion USD.
Style boxes make it easy to determine if a portfolio is adequately diversified. By having holdings represented by each of the nine squares in the style box, a portfolio can be considered diversified. This assumes that no single style of investment comprises an inordinately large percentage of the portfolio.
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