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Why small caps are safer than the Top 40

The stats show that over the past few years, the smaller a listed company is the (on average) less risky it is.

If risk is defined as the volatility of a share or index’s returns, then over the last ten, five, three and one year time periods, the smaller a listed company is the (on average) less risky it is, apparently. According to statistics.

What I have done in this spreadsheet (Index Volatility Workings – Sources: Bloomberg, my workings) is the following (by all means check my workings, I’m neither perfect nor a statistician!):

  • Pulled ten years of weekly index and Naspers movements.
  • Calculated the weekly returns from these movements.
  • Used a crude market cap weighting to also strip Naspers movements out of the Top 40 Index movements, hence generating a crude Top 40 Index historical movement excluding Naspers growing influence on it.
  • Calculated the standard deviations of these movements for ten, five, three and one year.
  • Annualised these standard deviation to represent each index (and Naspers) annual historical volatility over the ten, five, three and one year periods.
  • Represented them in this graph below in descending order, i.e. From the riskiest/most volatile one to the safest/least volatile one:

 

Volatility-Index-Graph

Based solely on these workings and the theoretical assertion that volatility is the same as risk, not just are the mid cap stocks on the JSE on average “safer” than the Top 40, but the small cap stocks are on average “safer” than even the mid cap stocks.

So, on average, small caps are safer than the Top 40, including and excluding Naspers…

Over all my measured time periods.

Boom.

This article was first published on SmallCaps.co.za here, and republished with permission.

 

COMMENTS   3

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Tell that to the Investors of the Stanlib Small Cap funds in 2008, in which the year before won a raging bull award for performance. In 2008 the fund was down around 65% if I’m not mistaken.

If that doesn’t highlight volatility then I don’t know what else does.

The article is comparing the small, mid and Top 40 index and not small cap fund which is different.

Closing prices of JSE small caps are tremendously manipulated. It happens so easily that a stock will dip (or spike) intra day, but close unchanged.

End of comments.

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