Small Minus Big - SMB


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.

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.

  1. Structural Change

    An economic condition that occurs when an industry or market ...
  2. Small Firm Effect

    A theory that holds that smaller firms, or those companies with ...
  3. Small Cap

    Refers to stocks with a relatively small market capitalization. ...
  4. Large Cap - Big Cap

    A term used by the investment community to refer to companies ...
  5. Fama And French Three Factor Model

    A factor model that expands on the capital asset pricing model ...
  6. Market Capitalization

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