The Efects of Including Swedish Small-Cap Stocks in Large-Cap Stock Portfolios

Abstract

A longstanding question in finance is whether small-cap stocks outperform large-cap stocks on a risk-adjusted basis, a phenomenon known as the size premium. This study investigates how varying allocations between Swedish large-cap and small-cap equities affect portfolio returns, volatility, and risk-adjusted performance over the period from 1 January 2014 to 31 December 2024. The analysis is based on monthly data from the OMX Stockholm Large Cap and Small Cap price indices, excluding dividends. Hypothetical portfolios are constructed with small-cap weights ranging from 0% to 100% in 10% increments. Results show that portfolios with higher small-cap allocations consistently deliver higher average returns and Sharpe ratios, albeit with greater volatility. The small-cap-only portfolio outperforms all other allocations in risk-adjusted terms within the sample period. Additional rolling-window and maximum drawdown analyses confirm the higher risk–return profile of small-cap investments.