The “Small Cap Effect”, or the ability of small cap stocks to outperform large cap stocks, is alive and well in the Canadian Market-place. Furthermore, a number of active small cap managers exhibit low volatility profiles, combined with very low correlations to large cap managers, and as a result offer superior diversification when combined with large cap managers. Our analysis showed an aver-age return improvement of over 4{3ecd1be486a9e87a4f4369018c2c82e0b20ae56f3805f05eebdf95b8ef27da05} , with a risk reduction of over 1{3ecd1be486a9e87a4f4369018c2c82e0b20ae56f3805f05eebdf95b8ef27da05}, can be achieved through diversification with small cap.

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