Small firms will have relatively high loadings (high betas) on the SMB (small minus big) factor. a. Explain why. b. Now suppose two unrelated small firms merge. Each will be operated as an independent...

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Answered Same DayDec 24, 2021

Answer To: Small firms will have relatively high loadings (high betas) on the SMB (small minus big) factor. a....

Robert answered on Dec 24 2021
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a) The Fama-French(FF) three facor model holds that one of the factors driving returns is firm size. An index with returns highly correlated with firm size (i.e firm capitalisation) that captures this factor is SMB(Small minus Big),the return for a portfolio of small stocks in excess of the return for a portfolio of large stocks.The returns for a small firm will be positively correlated with SMB.Moreover, the smaller the firm,the greater its residual from the other two factors.,the market portfolio and the HML...
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