Risk-Return Trade-Off Between Small-Cap and Large-Cap Stocks

Yixin Zhang

Co-Presenters: Individual Presentation

College: College of Business and Public Management

Major: BS.ACCOUNTING

Faculty Research Mentor: Yu, Huaibing  

Abstract:

This research project examines the performance differences between small-cap and large-cap stocks in the U.S. financial market. In finance, companies are often classified by market capitalization, which refers to the total market value of a company’s outstanding shares. Large-cap companies are typically well-established firms with stable earnings and lower risk, while small-cap companies are smaller firms that often have higher growth potential but also higher volatility. Understanding the relationship between company size, risk, and return is an important topic in financial theory and investment decision-making.The purpose of this study is to analyze whether small-cap stocks generate higher average returns than large-cap stocks and whether they also involve greater risk. To represent small-cap stocks, this research uses the Russell 2000 Index, while the S&P 500 Index is used to represent large-cap stocks. Historical price data over the past ten years is collected from Yahoo Finance. The study calculates annual returns to measure performance and uses standard deviation to evaluate volatility as a measure of risk. Charts and tables are used to visually compare the trends and fluctuations of both indexes over time.The expected results suggest that small-cap stocks may offer higher average returns during certain economic periods but also experience larger price fluctuations. In contrast, large-cap stocks tend to provide more stable returns with lower volatility. The findings of this research help illustrate the risk–return tradeoff and provide practical insights for investors who are deciding how to allocate their portfolios between growth opportunities and stability.