The Fama-French Three-Factor Model is an asset pricing model that expands upon the traditional Capital Asset Pricing Model (CAPM) by including two additional factors to better explain stock returns. The model posits that the expected return of a stock can be determined by three factors:
Mathematically, the model can be expressed as:
Where is the expected return of the asset, is the risk-free rate, is the expected market return, is the sensitivity to market risk, is the sensitivity to the size factor, is the sensitivity to the value factor, and
Start your personalized study experience with acemate today. Sign up for free and find summaries and mock exams for your university.