He noticed that almost all the managers invested in big companies. Booth pleaded to start a small-cap index fund, but his colleagues guffawed at his presentation. The next day Booth started DFA in his Brooklyn apartment, ripping out the sauna to put in a Quotron machine. As Booth began looking for clients, another of Fama's graduate students, Rolf Banz, was researching the performance of small stocks vs. large. The reasoning is pretty straightforward.
Smaller companies are riskier than larger companies and have a higher cost of capital.
No one would invest except in expectation of earning a commensurately higher return. Sinquefield, who had been following Banz's research, immediately proposed a small-cap index fund at American National. The bank nixed the idea. By coincidence, Booth called shortly afterward to say his fledgling firm was hatching a product just like the one Sinquefield's employer had deep-sixed. Sinquefield quit his job and joined Booth.