Evaluating the Risk-Adjusted Returns across Large-Cap, Mid-Cap and Small-Cap Mutual Funds: Investor Insights and Implications

This study examines the risk-adjusted returns of large-cap, mid-cap, and small-cap mutual funds to provide insights for investors seeking optimal portfolio allocation. Using key performance metrics such as the Sharpe ratio, Treynor ratio, and Jensen’s alpha, the analysis evaluates the risk-return tradeoff across different market capitalizations. Findings indicate that while small-cap funds tend to offer higher absolute returns, they exhibit greater volatility, whereas large-cap funds provide more stability with lower risk-adjusted performance. Mid-cap funds balance risk and return but demonstrate varying performance across market cycles. The study's results have significant implications for investors aiming to optimize diversification strategies based on risk tolerance and investment objectives. In summary, large-cap funds provide safety, mid-cap funds offer balanced growth, and small-cap funds deliver the highest return potential but with elevated risk. Investors should select funds based on their risk tolerance, with large caps for stability, mid caps for moderate risk-reward, and small caps for aggressive growth.