Answer to Question #7521 in Finance for LEAH

Question #7521
what is the definition of firm size, or how to decide a firm is large or small cap, according to Fama French paper?
Expert's answer
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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