The Fama-French model is an asset pricing model introduced by Eugene Fama and Kenneth French in the early 1990s. It expands upon the traditional Capital Asset Pricing Model (CAPM) by incorporating size and value factors to explain stock returns better. The model is based on three key factors:
The Fama-French three-factor model can be represented mathematically as:
where is the expected return on asset , is the risk-free rate, is the return on the market portfolio, and is the error term. This model has been widely adopted in finance for asset management and portfolio evaluation due to its improved explanatory power over
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