The table below reports the average of annual distributions of stock returns for large and small U.S. listed firms, 1963-2020, excluding REITs. The largest firms are the highest 500 by market capitalization in December of the prior year each year and the smallest are the next 1000 by market capitalization. In all, they cover 96% of listed firms by market capitalization.
Source: Hochachka, G. 2022. The Distribution of US Stock Returns, 1963-2020. At https://ssrn.com/abstract=4143649. From 1963-1967, the small group contains less than 1000 stocks.
| Large 500 | Small 1000 | |
|---|---|---|
| 99th Percentile | 99% | 156% |
| 95th Percentile | 61% | 85% |
| 90th Percentile | 46% | 61% |
| 75th Percentile | 27% | 33% |
| Median | 10% | 10% |
| 25th Percentile | -6% | -10% |
| 10th Percentile | -21% | -30% |
| 5th Percentile | -30% | -42% |
| 1st Percentile | -48% | -63% |
| Portion | 65% | 62% |
| Positive | ||
| Portion that Exceed T-bills | 59% | 57% |
While the median return is the same for both groups, smaller stocks have a higher upside return at all percentiles of the distribution, yielding a higher mean return. However, the smaller stocks have lower returns on the downside. In short, they have higher downside risk compensated with upside potential. But there is a trap: This pattern can flip. Your chapter 12 explains and shows how to avoid the trap.
