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How would you use the Consumption-CAPM to explain the small-firm effect? (i.e. firms with small market...

How would you use the Consumption-CAPM to explain the small-firm effect? (i.e. firms with small market capitalisation have higher returns)

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How would you use the Consumption-CAPM to explain the small-firm effect? (i.e. firms with small market capitalisation have higher returns)

Answer: publicly traded companies can be divided into three categories

1- Large cap

2- Mid cap

3- small cap

Small firm have high potential to growth more than the large one. As they have small amount of fund any problem can be corrected efficiently. Because of the size of the firm their funding problem can be corrected quickly. Small firm have high opportunity to grow and also have more opportunity to give high return than the large firm. Small firm appreciation rate is higher as compare to lagre firm. At the same time small firm stock outsourcing is higher than that of large firm. fame and French released factors model released in 1992. In their model they explained that small firm have high opportunity to grow than the large firm.

Hope answered your question thank you.

Rahul Sunny answered 7 months ago
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