West Loop Financial LLCResurrecting the Size Premium – West Loop Financial LLC https://www.westloopfinancial.com Evolutionize Site Wed, 19 Aug 2020 20:50:49 +0000 en-US hourly 1 https://wordpress.org/?v=5.1.22 Resurrecting the Size Premium https://www.westloopfinancial.com/2014/08/25/resurrecting-the-size-premium/ https://www.westloopfinancial.com/2014/08/25/resurrecting-the-size-premium/#respond Mon, 25 Aug 2014 09:00:17 +0000 http://evolvemypractice.com/?p=1256 There have been a number of articles over the past few years claiming to refute the existence of a small-cap (or size) premium, which is the historical difference in returns between small-cap stocks and large-cap stocks. While the critiques have been somewhat varied, two common claims are that the risk-adjusted returns of small-cap stocks have...

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]]> There have been a number of articles over the past few years claiming to refute the existence of a small-cap (or size) premium, which is the historical difference in returns between small-cap stocks and large-cap stocks. While the critiques have been somewhat varied, two common claims are that the risk-adjusted returns of small-cap stocks have been similar to large-cap stocks and that the performance of small-cap stocks has been weak in international stock markets.

The Size Premium in Growth and Value Stocks

While it’s true in aggregate that small-cap stocks have had similar risk-adjusted returns (or Sharpe Ratios) compared with large-cap stocks, a more nuanced picture emerges when we separately look at the performance of small-cap versus large-cap in growth stocks and then in value stocks. The figure below displays the difference in Sharpe Ratios comparing small-cap growth stocks with large-cap growth stocks and then comparing small-cap value stocks with large-cap value stocks.

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