Fama and French Three Factor Model

Definition:

Created by Eugene Fama and Kenneth French to describe the expected return of a portfolio. Their model includes the market exposure (known as beta in the Capital Asset Pricing Model) plus two other risk factors: SMB (Small Minus Big) and HML (High Minus Low.) SMB accounts for the tendency for stocks of firms with small market capitalizations generate higher returns, while HML accounts for the tendency that value stocks (of firms with high Book to Market ratios) generating higher returns.

Investing Essentials


Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University

Term of the Day

Tactical Asset Allocation (TAA)

Portfolio strategy that allows active departures from the normal asset mix according to specified objective measures of value. Often called active management. It involves forecasting asset returns... Read More

Subscribe to the Term of the Day via email Get the Term of the Day in your inbox!


Create your free portfolio