15. Small firms will have relatively high loadings (high betas) on the SMB (small minus big) factor.
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15. 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 unit of the merged company. Would you expect the stock market behavior of the merged firm to differ from that of a portfolio of the two previously independent firms? How does the merger affect market capitalization? What is the prediction of the Fama-French model for the risk premium on the combined firm? Do we see here a flaw in the FF model?
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