Fama-French model adds size and value factors to CAPM
Image: David Shankbone, CC BY 3.0, via Wikimedia Commons
Fama–French three-factor model
Fama-French model adds size and value factors to CAPM
The Fama-French three-factor model includes market excess return, small versus big company outperformance, and high versus low book/market value company outperformance. These factors extend beyond the market beta used in the CAPM model, providing a more comprehensive explanation of stock returns.
Example
A small-cap stock may outperform large-cap stocks, contributing to the small versus big company factor in the Fama-French model.
Remember this
Understanding these additional factors helps investors better predict stock returns and manage portfolios more effectively.
Text adapted from Wikipedia, licensed under CC BY-SA 4.0.
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Educational content, not financial advice.
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