Size Premium refers to the observed empirical phenomenon in financial markets where smaller capitalization assets or companies historically yield higher risk-adjusted returns compared to larger capitalization counterparts over long periods. In crypto investing, this suggests that smaller, newer digital assets might offer greater growth potential. Its basis is often linked to market inefficiency and higher risk.
Mechanism
The mechanism behind the size premium is often attributed to several factors: smaller entities may be less liquid, have higher information asymmetry, or carry greater operational and financial risk, for which investors demand additional compensation. This compensation materializes as higher expected returns. It is a long-term factor effect rather than a short-term anomaly.
Methodology
The methodology for incorporating the size premium into investment strategy involves allocating a portion of a portfolio to smaller-cap assets, expecting their long-term outperformance. For crypto investors and systems architects designing asset allocation models, considering the size premium means accounting for the higher volatility and potential illiquidity of smaller tokens while seeking opportunities for substantial capital appreciation. This informs risk-return trade-offs.
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