What does the Fama-French model show?

What does the Fama-French model show?

The Fama French 3-factor model is an asset pricing model that expands on the capital asset pricing model by adding size risk and value risk factors to the market risk factors. The model was developed by Nobel laureates Eugene Fama and his colleague Kenneth French in the 1990s.

What are the 5 factors Fama French?

Application of the Fama French 5 factor model The empirical tests of the Fama French models aim to explain average returns on portfolios formed to produce large spreads in Size, B/M, profitability and investment. Firstly, the model is applied to portfolios formed on size, B/M, profitability and investment.

How do you interpret the Fama French three factor model?

The Fama-French Three-Factor Model Formula rf = Risk-free rate. ß = Factor’s coefficient (sensitivity) (rm – rf) = Market risk premium. SMB (Small Minus Big) = Historic excess returns of small-cap companies over large-cap companies.

Is the Fama-French three-factor model better than the CAPM?

Empirical results point out that Fama and French Three Factor Model is better than CAPM according to the goal of explaining the expected returns of the portfolios.

How do you make a Fama French portfolio?

The Fama-French Portfolios are constructed from the intersections of two portfolios formed on size, as measured by market equity (ME), and three portfolios using the ratio of book equity to market equity (BE/ME) as a proxy for value.

Is Fama French arbitrage pricing theory?

The Fama-French Three-Factor-Model (TFM) is based on the Arbitrage Pricing Theory (APT) and is one of the most famous models. The Arbitrage Pricing Theory states that systematic risk is of multidimensional character and is therefore dependent on different economic risk factors.

Why is Fama-French better than CAPM?

Empirical results point out that Fama and French Three Factor Model is better than CAPM according to the goal of explaining the expected returns of the portfolios. However, the paper shows that the results vary depending on how the portfolios are formed.