why when size factor and value factor <0 signal a growth-oriented , high market risk stock? how does value factor plays a role here ? Thanks.
value factor beta = positive when value stock (demand more return), if negative, must be growth stock Size factor = positive when small cap, small caps = higher risk stocks
I had the same question for months if the size factor sensitivity is negative, that means we are talking about a large cap stock. I’m tired after studying most of the day, but I’ll do my best to explain a tough subject. Think like how a negative currency correlation (in portfolio management)…when the currency goes down the stock goes up. In this case a negative size factor indicates large cap Negative value factor indicates … not value at all (think the opposite of value) which is growth I know it’s a terrible explanation, but it’s something. Market factor is just market beta, and a high beta indicates more risk than the market When I wake up tomorrow hopefully some other people wrote down more in this subject.
What this does is reinforce Fama and French’s love story with Small Cap Value stocks. They believe that the returns for Growth (Large, Mid, Small) are not justified for the amount of risk undertaken. Just fyi, over the last 80 years US Small Cap Value has been the best performing US equity class by an incredible margin. http://www.magicdiligence.com/articles/5-reasons-to-own-small-cap-value You can see why Fama and French prefer Small Value.