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. Small Cap

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

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

    An economic condition that occurs when an industry or market ...
  6. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
RELATED FAQS
  1. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  2. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  3. How can a company execute a tax-free spin-off?

    The two commonly used methods for doing a tax-free spinoff are either to distribute shares of the spinoff company to existing ... Read Full Answer >>
  4. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
  5. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >>
  6. How can a company reduce the unsystematic risk of its own security issues?

    Companies can reduce the unsystematic risk of their own security issues simply by doing the most effective job possible of ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Achieving Better Returns In Your Portfolio

    We look at three risk factors that best explain the bulk of equity performance.
  2. Markets

    Understanding Small- And Big-Cap Stocks

    If you don't realize how big small-cap stocks can be, you'll miss some good investment opportunities.
  3. Insurance

    Market Capitalization Defined

    Find out the differences between mega-, large-, mid- and small-cap stocks and how each suits different investing styles.
  4. Markets

    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.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P 500 Trust

    Find out more about the SPDR S&P 500 ETF Trust, the characteristics of the exchange traded fund and the suitability of investing in the fund.
  6. Mutual Funds & ETFs

    ETF Analysis: Energy Select Sector SPDR

    Find out more about the Energy Select Sector SPDR Fund, the top holdings of this exchange-traded fund and the characteristics of the fund.
  7. Professionals

    DCF Vs. Comparables: Which One To Use

    DCF and Comparables models are widely used in equity valuation. We explain the pros and cons of each method.
  8. Investing

    Is There Still Opportunity in Japanese Stocks?

    Japanese stocks’ strong performance has prompted market watchers to question whether there’s still a case for adding exposure to the Land of the Rising Sun
  9. Investing News

    The Financial Singularity Will Destroy Your Return

    Given the current and future growth of financial technology, many believe algorithms will soon define what drives market outcomes. With a wealth of big data, algorithms would be able to create ...
  10. Fundamental Analysis

    Calculating Valuation

    Valuation is the process of determining what an asset is worth.

You May Also Like

Hot Definitions
  1. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  2. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  3. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  4. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  5. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  6. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!