Size and Value
Size Effect and Value Effect
Simply put, there is an return premium available for those who invest in small companies and value companies. Investing involves a relationship between risk and reward. For every degree of risk an investor takes on, the risk should be rewarded. There is no such thing as a safe investment that carries a high expected return!
Equities are riskier than fixed income; therefore, the long term expected return is higher. Small company stocks are riskier to own than large company stocks; therefore, the long term expected return is higher there also. The same story goes for growth companies versus value companies, with the value companies being riskier and therefore delivering a higher long term expected return.