Leveraging Market Anomalies in Active Equity Investing

Active equity investing involves taking positions in stocks that are expected to outperform the market. One approach within this strategy is to exploit market anomalies, which are instances where stock prices deviate from their expected values. Common anomalies include the size effect, value effect, and momentum effect.

For this essay question, discuss the concept of market anomalies and provide specific examples of how equity investors can leverage these anomalies to enhance portfolio performance. Additionally, analyze the potential challenges and risks associated with pursuing an active investing strategy based on these anomalies.