Small Minus Big (SMB) Definition - investopedia.comFama-French 5 factor model interpretation of coefficients...

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Small minus big is a factor in the Fama/ French stock pricing model.Other factors are used to explain portfolio returns.The small firm effect is when the size is based on a company's market cap.

The excess return that smaller companies give is called small minus big.The Capital Asset Pricing Model is an extension of the Fama/ French Three-Factor Model.The performance of the market as a whole is a factor in the CAPM model.The market factor is a factor.The amount of risk in a portfolio is explained by CAPM.According to CAPM, the primary explanation for the performance of a portfolio is the market as a whole.

Two factors are added to CAPM by the Fama/Three-Factor model.There are two other factors that contribute to a portfolio's performance according to the model.If a portfolio has more small-cap companies in it, it should perform better than the market over the long run.

High Minus Low is the third factor in the Three-Factor model.Companies with a high book value-to-market value ratio are referred to as high.Companies with a low book value-to-market value ratio are referred to as low.Companies with a high book to market ratio are considered to be value stocks.

Growth stocks have a low market-to-book value.Research shows that value stocks do better than growth stocks in the long run.In the long run, a portfolio with a large proportion of value stocks should do better than one that has a lot of growth stocks.

Portfolio managers can use the Fama/ French model to evaluate their returns.If the portfolio's performance can be attributed to the three factors, the manager has not added any value or demonstrated any skill.

The performance of the portfolio can't be attributed to the manager's ability if the three factors can completely explain it.A good portfolio manager picks good stocks."Alpha" is also what this out performance is called.

The Three-Factor model has been expanded to include other factors."quality," "low volatility," and others are included.