Fama-French Three-Factor Model
The Fama-French Three-Factor Model is a financial model developed by Eugene Fama and Kenneth French in 1992. It is used to explain the behavior of stock returns and to identify the sources of risk and return in the stock market. The model is based on the idea that stock returns can be explained by three factors: market risk, size risk, and value risk. The model is widely used by investors and financial analysts to evaluate the performance of stocks and to make investment decisions.
History of the Fama-French Three-Factor Model
The Fama-French Three-Factor Model was developed by Eugene Fama and Kenneth French in 1992. The model was an extension of the Capital Asset Pricing Model (CAPM), which was developed by William Sharpe in 1964. The CAPM was the first model to explain the behavior of stock returns and to identify the sources of risk and return in the stock market. The Fama-French Three-Factor Model was an improvement on the CAPM, as it added two additional factors to explain stock returns: size risk and value risk.
The Fama-French Three-Factor Model has become the standard model used by investors and financial analysts to evaluate the performance of stocks and to make investment decisions. The model has been widely accepted by the financial community and has been used in numerous studies and research papers.
Table of Comparisons
| Factor | Explanation |
|---|---|
| Market Risk | The risk associated with the overall stock market. |
| Size Risk | The risk associated with investing in smaller companies. |
| Value Risk | The risk associated with investing in stocks that are undervalued. |
Summary
The Fama-French Three-Factor Model is a financial model developed by Eugene Fama and Kenneth French in 1992. It is used to explain the behavior of stock returns and to identify the sources of risk and return in the stock market. The model is based on the idea that stock returns can be explained by three factors: market risk, size risk, and value risk. The model has become the standard model used by investors and financial analysts to evaluate the performance of stocks and to make investment decisions.
For more information about the Fama-French Three-Factor Model, you can visit the websites of the Financial Times, Investopedia, and Morningstar.
See Also
- Capital Asset Pricing Model (CAPM)
- Beta
- Sharpe Ratio
- Modern Portfolio Theory (MPT)
- Arbitrage Pricing Theory (APT)
- Risk-Adjusted Return
- Alpha
- Treynor Ratio
- Jensen’s Alpha
- Value at Risk (VaR)
