i am still a little unclear on how to read the Fama French Betas.
Say in this example we have:
SMB Beta 0.2
SMB Premium 3.5%
An analyst says: Since the company is small, the Fama French Model’s size impact would tend to increase the valud of the company we are looking at.
The answer is that the above statement is wrong because the size premium is positive which would decrease the value of smaller comapnies compared to relatively larger ones.
If beta is 0.2 then does this mean the portfolio is more large cap? As it is not above 1? If the size premium is positive does this mean we are holding more small cap?
Don’t forget the Fama-French is a rate of return model, i.e. you find an appropriate rate of return, r, for a company. This r will be used to discount cash flows. So anything that makes r larger would make the value of the company smaller.
Remember these are technically not “Betas” in a traditional sense - i.e. slope coefficients on a regression model. They are standardized scores - similar to a z-score. Therefore if your company is of “average” market cap the standardized score would be 0. Therefore since it is “Small minum Big” a positive standardized score would reflect a smaller market cap than the average. A negative standardized score would reflect a larger market cap than the average. This means you get a premium (higher return) for smaller companies and you get a lower rate of return for larger companies (one’s with lower/negative standardized scores).