The prospect of earning a premium for investing in small-cap companies is compelling. The so-called small-firm effect posits that companies with smaller market caps tend to outperform the market as a whole.
You can see from the index data that small caps have had a slight return advantage over the past 10- and 20-year periods; however, when that return is adjusted for risk (as measured by standard deviation) the advantage all but evaporates.
Karen Wallace does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.