Multiple choice

The size of the market capitalization of a fund's equity holdings is inversely proportional to the

  1. returns that can be expected from the fund

  2. level of risk assumed by the fund

  3. state of the stock market

  4. All of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Smaller market capitalization companies typically have higher growth potential but also higher volatility and risk. Thus, as market cap decreases, risk level increases - an inverse relationship. Returns (A) are not strictly inversely related - small caps may outperform in certain periods. Market state (C) affects all stocks. The inverse relationship exists between market cap and risk assumption.

Keep practicing — related questions