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My Favorite Way to Play the ‘Small-Cap’ Effect

In a world where “can’t-lose” investment themes regularly disappoint investors, the “small-cap effect” has stood the test of time.

The small-cap effect refers to the long standing market anomaly that small-cap stocks consistently outperform large-cap stocks over the long run. Widely debated among academics and analysts, the “small-cap effect” has found its way into every introductory text on modern finance and investment.

Why Do Small-Cap Stocks Outperform?

Eugene Fama, one of 2013’s Nobel Prize economics winners, and his colleague Ken French, both of the University of Chicago, analyzed the “small-cap” effect in their famous 1992 paper “The Cross-Section of Expected Stock Returns” covering the period 1963-1990.

Their conclusion?

Small-cap stocks were riskier than their large-cap counterparts. But as Modern Portfolio Theory suggests, that higher risk was compensated for by higher returns.

Other analysts have argued that the outperformance of small-cap stocks is due to market inefficiency. After all, small cap stocks aren’t as well covered as household names.

Click here to read the rest of the article, “My Favorite Way to Play the ‘Small Cap’ Effect.

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International investment expert Nicholas Vardy shares his method of taking advantage the 'Small Cap' effect.

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My Favorite Way to Play the ??Small-Cap?? Effect

International investment expert Nicholas Vardy shares his method of taking advantage the ‘Small Cap’ effect.

In a world where ??can??t-lose? investment themes regularly disappoint investors, the ??small-cap effect? has stood the test of time.

The small-cap effect refers to the long standing market anomaly that small-cap stocks consistently outperform large-cap stocks over the long run. Widely debated among academics and analysts, the ??small-cap effect? has found its way into every introductory text on modern finance and investment.

Why Do Small-Cap Stocks Outperform?

Eugene Fama, one of 2013??s Nobel Prize economics winners, and his colleague Ken French, both of the University of Chicago, analyzed the ??small-cap? effect in their famous 1992 paper ??The Cross-Section of Expected Stock Returns? covering the period 1963-1990.

Their conclusion?

Small-cap stocks were riskier than their large-cap counterparts. But as Modern Portfolio Theory suggests, that higher risk was compensated for by higher returns.

Other analysts have argued that the outperformance of small-cap stocks is due to market inefficiency. After all, small cap stocks aren’t as well covered as household names.

Click here to read the rest of the article, “My Favorite Way to Play the ??Small Cap?? Effect.

Newsletter Signup.

Sign up to the Human Events newsletter

Written By

Nicolas A. Vardy is the London-based International Economics Correspondent for Human Events.

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