The Fama-French Three-Factor Model: A Guide to Understanding Risk, Return, and Stock Investing Strategies
The Fama-French Three-Factor Model is a popular framework used in finance to understand the relationship between risk, return, and stock investing strategies. It was developed by Eugene Fama and Kenneth French in the early 1990s and has since become a standard tool for portfolio managers and finance researchers alike. In this article, we will take a closer look at the Fama-French Three-Factor Model, exploring its key concepts, applications, and limitations. Understanding Risk and Return: Key Concepts The Fama-French Three-Factor Model is based on the idea that there are three main factors that influence the expected return of a stock: market risk, size risk, and value risk. Market risk, as the name suggests, refers to the risk that comes with investing in the stock market as a whole. Size risk refers to the fact that smaller companies tend to have higher returns than larger ones, while value risk refers to the tendency of stocks with lower price-to-book ratios to outperform those with ...