The small-firms effect is the theory that firms with a smaller capitalisation will outperform those firms with a larger market capitalisation. This effect was one of the three factors use in Eugene Fama and Kenneth Frenchâs Three-Factor Model that was made in 1993.
To test this theory, we ran a backtest using the Bloomberg back-testing tool on the Singapore markets. In this test, we compared the performance of an equally-weighted portfolio of stocks against half the number of stocks with a different market capitalization.
Back-tests were done over the following: