morningstar stock research the perfect mix of large-, ….pdf

Morningstar Stock Research The Perfect Mix of Lar ge-, Mid-, and Small-Cap Stocks Portfolio A Large-cap stocks Even mix of small- and mid-cap stocks Consider Adding Mid-Cap and Small-Cap Stocks to Your Large-Cap Portfolio Did you know that by adding mid- and small-cap stocks to your large- cap portfolio, it may be possible to improve return without neces- sarily increasing (and possibly even decreasing) the portfolio’s risk? While large-cap stocks are typically mature, panies with market caps in excess of $5 billion, mid-cap stocks are panies that, although having essfully navigated their startup years, still have market caps between $1 and $5 billion. Small-panies, generally the youngest and least established of the three, have less than $1 billion in market capitalization. The following illustrations show the risk and return for four hypo- thetical por tfolios over the time period 1 976–2005 . 1 00% 1 00% 60% 40% 30% 70% Adding Mid- and Small-Cap Stocks May Increase Return Without Increasing Risk The illustration above demonstrates that adding a mix of mid-cap and small-cap stocks to a large-cap portfolio may increase return without necessarily incr easing risk. The r eturn of hypothetical Portfolio C is percentage points higher than the return of Portfolio A ,and risk did not increase. How much is that extra return worth? Risk: Retur n: Risk: Re