Small Minus Big - SMB

AAA

DEFINITION of 'Small Minus Big - SMB'

One of three factors in the Fama and French stock pricing model. SMB accounts for the spread in returns between small- and large-sized firms, which is based on the company's market capitalization.

This factor is referred to as the "small firm effect", as smaller firms tend to outperform large ones.

INVESTOPEDIA EXPLAINS 'Small Minus Big - SMB'

Fama and French's Three Factor model is a way to evaluate a portfolio manager's returns. A typical measure of good performance is large excess returns. The model's three factors, including SMB, attempt to explain excess returns made by a manager's portfolio. Incorporating SMB shows whether management was relying on the small firm effect (investing in stocks with low market capitalization) to earn an abnormal return. If the manager was buying only small-cap stocks, then his excess return would be diminished compared to if high yielding large stocks were also selected.

RELATED TERMS
  1. Fama And French Three Factor Model

    A factor model that expands on the capital asset pricing model ...
  2. Large Cap - Big Cap

    A term used by the investment community to refer to companies ...
  3. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
  4. Small Cap

    Refers to stocks with a relatively small market capitalization. ...
  5. Small Firm Effect

    A theory that holds that smaller firms, or those companies with ...
  6. Structural Change

    An economic condition that occurs when an industry or market ...
Related Articles
  1. Achieving Better Returns In Your Portfolio
    Bonds & Fixed Income

    Achieving Better Returns In Your Portfolio

  2. Understanding Small- And Big-Cap Stocks
    Markets

    Understanding Small- And Big-Cap Stocks

  3. Market Capitalization Defined
    Insurance

    Market Capitalization Defined

  4. An Introduction To Small Cap Stocks
    Markets

    An Introduction To Small Cap Stocks

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center