Nevertheless, the relevance of this assessment can't be dismissed. Stocks with lower market capitalizations have been found to perform better than their indexes, originally coined the "size effect" by Wolf Banz. Furthermore, in a dissertation by John J. Schmitz (now a portfolio manager at SciVest), it is demonstrated that the "size effect" cannot be explained even with multivariate factor models.
In the face of evidence suggesting the markets are not efficient, proponents of Efficient Markets Hypothesis (EMH) have never backed down before, would you expect them to now? Hardly! A flurry of papers contradicting the notion of a "size effect" have been published. Notably,
- Chan, Chen and Hsieh (1985) find that from 1958 to 1977, the Ross APT model explains away size effects
- Chan and Chen (1991) find that small firms tend to have lower efficiency and higher financial leverage
- Several articles maintain that smaller companies tend to be less diversified and more risky than larger companies (recall that EMH suggests you can achieve higher returns than the market, but that you can only do it by taking on more risk)
Volatility is not risk! Volatility is good: it allows you to find companies trading below their intrinsic value.