Portfolio Design: A Modern Approach to Asset Allocation

WHAT DO WE MEAN BY SMALL-CAP STOCKS?

Stocks in the United States range in value from a few million dollars to more than $340 billion. U.S. stocks are traded on a number of exchanges across the United States. But most stocks are listed on three exchanges: the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX). The Ibbotson SBBI 2010 Yearbook provides a breakdown of the stocks on these three exchanges into 10 deciles.4 The deciles are defined by using NYSE stocks alone, but stocks from all three exchanges are included in each decile so the number of stocks varies from decile to decile.5 The lowest decile (10) includes more than 1,300 stocks because many of the stocks listed on the NASDAQ and AMEX are much smaller than the average stock on the NYSE.

The largest U.S. stocks dominate the overall market capitalization of the U.S. stock market. The top decile includes only 168 firms, but these firms represent more than 63 percent of the total market capitalization of the three stock exchanges. The top three deciles include only 518 firms, but represent more than 83 percent of the total capitalization. On the other hand, the lowest two deciles contain more than 1,900 stocks, but represent less than 2.5 percent of the market capitalization!

The longest small-cap series available is the small-cap index reported in the SBBI Yearbooks, the index cited in Table 3.1. For most of the sample period, prior to 1982, the small-cap series consisted of the stocks in the ...