The Fama-French Model is an asset pricing model developed by Eugene Fama and Kenneth French that extends the Capital Asset Pricing Model (CAPM) by incorporating additional factors to better explain stock returns. While the CAPM considers only the market risk factor, the Fama-French model includes two additional factors: size and value. The model suggests that smaller companies (the size factor, SMB - Small Minus Big) and companies with high book-to-market ratios (the value factor, HML - High Minus Low) tend to outperform larger companies and those with low book-to-market ratios, respectively.
The expected return on a stock can be expressed as:
where:
By accounting for these additional factors, the Fama-French model provides a more comprehensive framework for understanding variations in stock
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