hey guys, I hope your preparations for the exam are going well. I have a quick question regarding Size Premium, an additional risk premia over the CAPM Required Rate of Return formula. It says that small-cap stocks result in excess returns over large-cap. How so? is there a fundamental reasoning behind this or is just due the law of supply and demand, i.e. lesser number of shares outstanding for a small-cap than a large-cap?! thanks in advance
Historical returns have shown that small cap stocks on average have had higher returns than large cap stocks.
The size premium is related to the extra risk associated with small cap stocks. Small caps are less financially secure, so investors demand a higher expected return relative to large cap stocks.
Hank moody is right, very nice username, BTW. You can search for Fama/French research online, look for a 1992 paper.