I have six portfolios based on size-bm ratio following FF (1993) methodology these are SL, SN, SH, BL, BN and BH. The interpretation of the coefficient of SMB is like:
  • βsml > 0, then the portfolio has higher expected returns if small-cap stocks outperform large-cap stocks, suggesting that the portfolio is predominantly small-cap stocks
  • 0 > βsml, then the portfolio has higher expected returns if large-cap stocks outperform small-cap stocks, suggesting that the portfolio is predominantly large-cap stocks.
1. My question is how I interpret the coefficient of SMB when my dependent variable is a portfolio of:
  • big firms (say BL)
  • small firms (say SL)
2. And always there is positive slope of SMB for small portfolios and negative for big portfolios. Can I say that small firms portfolios are earning higher returns than big firms portfolios? Please help...
Thank you.