As the recovery Ages, Do Small Caps Retain an Edge?

Riepe, Mark W.
December 2004
Journal of Financial Planning;Dec2004, Vol. 17 Issue 12, p22
Academic Journal
This section deals with the financial performance of small capitalization premium in the U.S. during the recession from December 1969 to August 2004. The evidence is strong that small capitalization have led the way in the past, as one would expect, given their high beta nature. Timing is crucial, though. It is important to make an accurate forecast of when the trough will occur to fully take advantage of these tendencies. On the other hand, dawdling can be costly as well. Lots of relationships between variables look promising on paper, but investors should not underestimate the complexities of successful real-world implementation. One of the difficulties with any data analysis many years after the event, in this case refers to the trough of the economic cycle, is that conditions can change dramatically and the comparison is no longer terribly relevant. Of particular concern in this example is the fact that the economy would have descended back into a recession. A casual examination reveals a slim advantage for small capitalization relative to large to have a positive premium. Given that the Standard & Poor's 500 has about two-thirds of the volatility of the small-capitalization index, the return edge can be seen simply as compensation for exposure to extra volatility.


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