Academic research has demonstrated the existence of what is known as the “size” or “small-cap” premium beginning over 30 years ago. Today many investors take it as given that small stocks will outperform large stocks based on this foundational principle of finance. It is a rational expectation, since small stocks are demonstrably more risky than larger stocks, so they should provide investors with additional compensation for bearing this risk in the form of extra return.
With over four decades of return history for the Russell US Indexes we can produce a long-term analysis of the relative performance of large and small US companies using the Russell 1000 large cap index and the Russell 2000 small cap index. Over the last 40 years, large stocks have actually edged out small stocks by a slight margin through the end of 2018.
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