Fama French Three Factor Model
Overview
The Fama French three factor model is a famous model of equity returns
utilizing
a
multi factor framework
and
arbitrage pricing theory.
Multiple Factors
The Fama French model is specified as
{% r-r_f = \beta_1 (r_m -r_f) + \beta_2 \times SMB + \beta_3 \times HML %}
- {% r %} is the portfolio return
- {% r_f %} - the risk free rate
- {% SMB %} - small minus big, excess returns of small cap stocks to high cap stocks.
- {% HML %} - high minus low, is the exess returns of high price to book stocks to low price to book stocks
