Size premium

An addition to the required return for small companies, for their greater risk. Common in private company valuation, though the evidence for it is debated and it can overlap other premiums.

Where you will meet it

Size premium appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain what has to be adjusted when setting the discount rate for a private firm
  CFA Level II · Equities

  “Size premiums are often added for small companies, though the evidence is debated and they may overlap with other premiums.”

• Contrast the models for estimating the return required on private company equity, such as the build-up approach, the CAPM and the expanded CAPM
  CFA Level II · Equities

  “The expanded CAPM adds premiums: r = rf + β × ERP + size premium + company-specific premium, plus an industry premium only if the beta does not already capture industry risk.”

See also

Required return

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with S · Glossary