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

Underwrite

To guarantee, as to guarantee the issuer of securities a specified price by entering into a purchase and sale agreement. To bring securities to market.

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