What are the 5 factors in Fama-French?
It has been proven that a five-factor model directed at capturing the size, value, profitability, and investment patterns in average stock returns performs better than the three-factor model in that it lessens the anomaly average returns left unexplained.
What are the risk factors of the Fama-French four factor model?
Today, the four factors of market, style, size, and momentum, constitute the Fama-French 4 Factor Model.
How are Fama-French factors calculated?
The model uses market capitalization to calculate a company’s size, comparing small-cap firms to large cap-firms. It uses book-to-market to calculate a company’s value, comparing high book-to-market value companies against low book-to-market value companies.
What is the Fama-French SMB factor?
Key Takeaways Small minus big (SMB) is a factor in the Fama/French stock pricing model that says smaller companies outperform larger ones over the long-term. High minus low (HML) is another factor in the model that says value stocks tend to outperform growth stocks.
What the Fama and French 3 factors tell us about risk and return?
The Fama and French model has three factors: the size of firms, book-to-market values, and excess return on the market. In other words, the three factors used are SMB (small minus big), HML (high minus low), and the portfolio’s return less the risk-free rate of return.
What is RMW and CMA?
Defined analogously to the HML factor, the profitability factor (RMW) is the difference between the returns of firms with robust (high) and weak (low) operating profitability; and the investment factor (CMA) is the difference between the returns of firms that invest conservatively and firms that invest aggressively.
What are the three factors of risk?
In disasters, there are three broad areas of risk to health: the hazard that can cause damage, exposure to the hazard and the vulnerability of the exposed population (see also Chapters 1.3 and 2.5) (1).
What does Fama French 3 factor model tell you?
The Fama-French model aims to describe stock returns through three factors: (1) market risk, (2) the outperformance of small-cap companies relative to large-cap companies, and (3) the outperformance of high book-to-market value companies versus low book-to-market value companies.
How are the SMB and HML factors constructed?
To construct the SMB and HML factors, we sort stocks in a region into two market cap and three book-to-market equity (B/M) groups at the end of each June. Big stocks are those in the top 90% of June market cap for the region, and small stocks are those in the bottom 10%.
What does RMW mean in Fama French?
robust minus weak
For their part, Fama and French updated their model with two more factors to further capture asset returns: robust minus weak (RMW), which compares the returns of firms with high, or robust, operating profitability, and those with weak, or low, operating profitability; and conservative minus aggressive (CMA), which …
What is RMW in Fama French?
Fama and French (2015) incorporate the robust-minus-weak (RMW) gross profitability and the conservative-minus-aggressive (CMA) investment factors to form the so-called Fama–French (FF) five-factor model, which performs better than the seminal FF three-factor model.
What are the five components of the risk factor?
The five main risks that comprise the risk premium are business risk, financial risk, liquidity risk, exchange-rate risk, and country-specific risk. These five risk factors all have the potential to harm returns and, therefore, require that investors are adequately compensated for taking them on.
What does the HML factor mean?
High Minus Low
High Minus Low (HML) is a value premium; it represents the spread in returns between companies with a high book-to-market value ratio and companies with a low book-to-market value ratio. Once the HML factor has been determined, its beta coefficient can be found by linear regression.
What does HML mean in Fama-French?
Key Takeaways. High Minus Low (HML), also referred to as the value premium, is one of three factors used in the Fama-French three-factor model. The Fama-French three-factor model is a system for evaluating stock returns that. the economists Eugene Fama and Kenneth French developed.
What does a positive HML mean?
Similarly, a large, positive coefficient for the HML factor would indicate that the excess return is due to the company’s high book-to-market equity value.
What is HML factor?
High Minus Low (HML) is a value premium; it represents the spread in returns between companies with a high book-to-market value ratio and companies with a low book-to-market value ratio. Once the HML factor has been determined, its beta coefficient can be found by linear regression.