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what is the size factor for quantitative equity portfolio investing
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STRATxAI

May 2024 · 5 min read

Size Factor

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Educational
Intermediate

What is the size factor ?

When it comes to the stocks, the concept of company size is a well understood concept. It literally relates to the market capitalization (market cap) of a company which is obtained by multiplying the company shares outstanding by the share price each day. In terms of mathematical formula, for stock i with market cap = m, price = p, shares outstanding = s, we have the following formula

Size was one of the first explanatory factors used back when the capital asset pricing model (CAPM) was expanded upon in the 1990s. This CAPM model that related a stocks return to some alpha plus beta times the market return was too simplistic. Professors Fama and French expanded upon this model by introducing a value factor and a size factor, which they called high-minus-low (hml) and small-minus-big (smb).

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