A Holistic View of Volatility
Last week, we highlighted how return smoothing in private markets makes their volatility metrics less meaningful. But even in public markets, care must be taken when assessing the volatility of individual asset categories.
Small cap stocks have had higher volatility than large cap stocks. For example, the annualized standard deviation of a global small cap index from January 1999 to June 2026 was 17.93%, compared to 15.30% for global large caps. But the variability of an investor’s account balance depends on the entirety of the portfolio, not its individual components. Small caps behave differently from large caps and therefore offer a diversification benefit when added to the equation. The net effect for combining large and small caps is standard deviations very similar to the large caps themselves. Returns, on the other hand, meaningfully increased with increasing weight in small caps.
This concept of evaluating volatility holistically rather than in a vacuum is old news, of course. The Nobel laureate Harry Markowitz spelled this out 70 years ago in his Modern Portfolio Theory framework. But it’s a good reminder that for any asset category, risk and return statistics in isolation do not provide a complete recipe to evaluate it.
Global Stock Performance
January 1999–June 2026
Past performance is not a guarantee of future results. Actual investment returns may be lower.
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Glossary
Return smoothing: A practice that mechanically reduces the volatility of reported returns. Private market assets are valued only periodically, which can appear to dampen short-term price fluctuations and make returns appear to have lower volatility.
Standard deviation: A measure of the variation or dispersion of a set of data points. Standard deviations are often used to quantify the historical return volatility of a security or portfolio.
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