Size Premium

Definition

An additional return demanded by investors for holding the equity of smaller companies, reflecting the empirically observed tendency for small-capitalisation stocks to earn higher returns than predicted by the Capital Asset Pricing Model alone. Size premiums are commonly sourced from the Duff & Phelps (now Kroll) Cost of Capital Navigator and are added to the cost of equity in the build-up method or as a modification to CAPM. The existence and magnitude of the size premium remain subjects of academic debate.