I know that I should answer “value stocks are more volatile” on exam which doesn’t make sense for me. But what about this: Schweswer Qbank: SS10, R31, Los g, Q1: Which of the following is least likely to be a rationale for investing in small cap stocks? A) The higher betas for small cap stocks indicate that their future returns should be higher. B) Smaller firms are more likely to be underpriced than larger cap stocks with greater coverage C) Small-cap stocks are likely to have higher growth in the future D) Higher returns are more likely when starting from a smaller stock price base. I answered D) - Incorrect! Correct answer A) Could somebody explain? I thought that the reason D) is the one that “Silly” investors use - I am wrong?
because that would imply the market has to go up… what if market goes down? their return is even lower than the market due to that juicy beta… sounds good to me.
D is the tricky answer because it doesn’t seem like rationale but rather a myth. A is the answer because investing in high beta stocks is not a small cap rationale. You can invest in high beta large cap stocks as well for the same effect. however, most large cap stocks do not have a stock price of $3/share (or 2 or 4 or…), aren’t aniticpated to grow rapidly in the future, and have far more coverage than small caps.