Large Cap Growth Stocks are defined as those stocks that are generally among the largest in terms of market capitalization and correspondingly have the lowest Book to Market (BtM) ratios.

Although Large Cap Value stocks have provided greater returns over time, most investors should have some exposure to Large Cap Growth stocks as well. Compared with value stocks, growth stocks are healthier companies with better prospects for growth in sales and earnings. Because they are safer, they have a lower cost of capital. Although this translates into lower expected returns for investors, the chart below reveals that when risk (as measured by volatility) is accounted for, the higher absolute returns attributable to value stocks disappear. It is also important to realize that there have been extended periods when growth stocks have outperformed value stocks, so investors who have no exposure to this asset class may experience years when the equity portion of their portfolio’s growth will lag that of the overall market.

All this suggests that an investor can “fine tune” his equity risk exposure through a prescribed allocation to large cap growth stocks that is consistent with his tolerance for risk.