Topic 36

Size Premium

Topic 36 explores the size premium deciles as developed and reported by Ibbotson Associates. Actual returns by size decile of the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and Nasdaq as measured over time exceed the returns expected by capital asset pricing model (CAPM) as the market cap of the size deciles decreases. This suggests the need for a size premium adjustment in the construction of CAPM returns, particularly for smaller target companies (see Topic 29).

SIZE PREMIUMS ARE INVERSELY RELATED TO FIRM SIZE

  • As reported by Ibbotson, the overall equity return for large-company equity securities as a whole on the U.S. equity markets in excess of risk-free rates over the last 84 years for the period ending December 31, 2009, is 6.7%.1
  • The size premium (return in excess or under the return expected from the CAPM) for the largest-cap companies in the first decile (over $14.7 billion market cap) of the NYSE, AMEX, Nasdaq as reported by Ibbotson is −.37%.
  • The size premium (return in excess or under the return expected from the CAPM) for the small-cap companies in the tenth decile (up to $214 million market cap) of the NYSE, AMEX, Nasdaq as reported by Ibbotson is 6.28%.
  • The deciles reported by Ibbotson are from securities data from the NYSE, AMEX, and Nasdaq exchanges.
  • Mid-cap, low-cap, and micro-cap companies have exhibited higher returns than large-cap companies (and in excess of the return expected from the CAPM) over long time periods ...

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