1) The video is just that small. It's a 320x200 video, and we have much higher resolution screens nowadays. Monitors often don't accept such a low resolution anymore, but if yours does you can get the video full screen by editing keeperfx.cfg and changing the second entry of FRONTEND_RES to '320x200x8'.
But KeeperFX simply does not stretch the video.
2) It's 20 FPS, this is what is was, and everything in the game is matched to '20 game turns per second'. So if you increase the frame rate to 60, you either get 3 identical frames, or a game that has been sped up 3 times. If you want the latter, you can set the -fps
command line option to 60.