Alternative Small-Cap Stock Benchmarks

Abstract

With continuing interest in the small–cap stock anomaly and in the size–related style of investing, several financial services firms have created size–related stock indexes intended to measure the risk–return results for these stocks. The authors compare the alternative benchmarks, and provide updated risk–return results for the small–cap sector. They note some differences among the small–cap stock benchmarks, but mainly show there are strong similarities among them. The updated risk–adjusted performance results indicate that small–cap stocks lag other asset classes, and there are major differences in interest rate sensitivity. Finally, there have been significant changes in the correlations and risk measures over time; notable are weaker trends in the correlations with large–cap stocks and in the systematic risk (beta) of the small–cap stocks.