Go smaller and you buy a deeper
hole, not a bigger return.
Same equal-weight engine. Same fortnightly rebalance. Only the cap segment changes.
| Cap segment |
5Y CAGR |
Max DD |
Sharpe |
| Allcap | 48.02 | -22.70 | 1.77 |
| Midcap | 41.21 | -24.87 | 1.48 |
| Smallcap | 41.03 | -22.35 | 1.58 |
| Microcap | 40.56 | -26.44 | 1.53 |
Banz 1981 measured the size premium at about 5.2 pct a year. Out of sample since, it reads closer to 1.5 pct. Roughly 71 pct of it decayed. The cap curve above is the same story up close. Microcap gives back 0.47 pp of return for 4.09 pp more drawdown than smallcap.