what is the definition of firm size, or how to decide a firm is large or small cap, according to Fama French paper?
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Expert's answer
2012-03-20T11:32:59-0400
Fama and French paper examines an important relation between firm size, book-to-market ratios and security returns for nonfinancial firms. Firm size and book-to-market equity picked up all the variation in returns that could be explained by the other variables, including the beta (sensitivity to the market return) of the CAPM (Capital Asset Pricing Model). The hypothesis of Fama and French is the return of big sized portfolios is less than the return of small sized portfolios. Small firm is the firm with small-value stock where the underlying company has a small market capitalization, and whose stock price is currently trading at or lower than its book value. Small cap stocks tend to outperform large cap stocks, because small stocks in general have a greater opportunity to grow compared to their larger counterparts.
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