What is 'Small Minus Big - SMB'

Small minus big (SMB) is 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.

BREAKING DOWN '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. Small Firm Effect

    A theory that holds that smaller firms, or those companies with ...
  2. High Minus Low - HML

    One of three factors in the Fama and French asset pricing model. ...
  3. Fama And French Three Factor Model

    A factor model that expands on the capital asset pricing model ...
  4. Multi-Factor Model

    A financial model that employs multiple factors in its computations ...
  5. Abnormal Return

    A term used to describe the returns generated by a given security ...
  6. Small-Value Stock

    A description of stock where the underlying company has a small ...
Related Articles
  1. Investing

    Explaining the Fama and French Three-Factor Model

    The Fama and French three-factor model expands on the CAPM to provide a more thorough tool that measures portfolio performance and predicts future returns.
  2. Investing

    Investigating The Stock Premium Puzzle

    The Three-Factor Model tries to demystify the baffling small-cap and value return premiums.
  3. Managing Wealth

    Achieving Better Returns In Your Portfolio

    We look at three risk factors that best explain the bulk of equity performance.
  4. Financial Advisor

    Small Cap Investing: How to Think About Illiquidity

    Do your homework, have a long term view, exercise patience, you'll find that investing in small market capitalization stocks is no riskier than investing in large stocks
  5. Investing

    What are Excess Returns?

    Excess returns are investment returns that exceed a benchmark or index with similar risk.
  6. Managing Wealth

    6 Ways To Improve Your Portfolio Returns Today

    These historically tested methods will improve your investment results.
  7. Small Business

    Calculating (Small) Company Credit Risk

    Determining creditworthiness of smaller and medium-sized corporations isn't as easy as for larger companies, but these tips can help.
  8. Investing

    Valuing Small-Cap Stocks

    When done right, small-cap investing can improve the performance of your portfolio without adding a great degree of risk.
  9. Investing

    An Introduction To Small Cap Stocks

    When it comes to a company's size, bigger isn't always better for investors. Find out more here.
  10. Investing

    How to Evaluate Stock Performance

    Learn how to evaluate stock performance. While what you look for in a stock could be different from another person, the way you analyze performance is the same.
RELATED FAQS
  1. Is maximizing stock price the same thing as maximizing profit?

    Simply put: yes. A company's stock price will factor in many different variables including the type of industry the firm ... Read Answer >>
  2. How do you calculate the excess return of an ETF or indexed mutual fund?

    Read about how to calculate and interpret the expected return generated by an exchange-traded fund (ETF) and an indexed mutual ... Read Answer >>
  3. What is the best way to invest in small cap companies?

    Learn about the best ways to invest in small cap companies. Find out when small cap companies yield the highest return and ... Read Answer >>
  4. How do the risks of large cap stocks differ from the risks of small cap stocks?

    Understand the important differences between large- and small-cap companies that make small-cap firms a more risky equity ... Read Answer >>
  5. Does investing in small cap stocks have advantages over investing in big cap stocks?

    Learn about the advantages of investing in small-cap stocks, and find out why some investors buy shares in small-cap rather ... Read Answer >>
  6. Why should I be looking at small cap stocks as a potential investment?

    Discover the role of small-capitalization stocks in an equity portfolio, and learn why investors take on additional risk ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center