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.

Related concepts

Beta (finance)

Beta measures a stock's volatility relative to the market

Arbitrage pricing theory

APT uses multiple systematic risk factors; CAPM uses a single market index

the Capital Asset Pricing Model (CAPM) says

CAPM formula: expected return = Rf + β(Rm - Rf)

Cronbach's alpha

Cronbach's alpha (α) measures internal consistency

Bias ratio

Bias ratio detects valuation bias in asset pricing

Capital asset pricing model

Treynor-Black model combines active stock picking with a passive market portfolio

Educational content, not financial advice.

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