Larry Schrenk Instructor Video 17 Topic 37 The FamaFrench Model Topics MultiFactor Models FamaFrench Model Pros and Cons MultiFactor Models CAPM One Factor Model Market Risk Other Possible Factors ID: 798506
Download The PPT/PDF document "FIN 614: Financial Management" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
FIN 614: Financial ManagementLarry Schrenk, Instructor
Video 17 (Topic 3.7):
The Fama-French Model
Slide2Topics
Multi-Factor Models
Fama-French Model
Pros and Cons
Slide3Multi-Factor Models
CAPM: One Factor Model
Market Risk
Other Possible Factors
Inflation
Interest Rates
Slide4Fama-French Model
Three Factor Model
Market
Risk Premium (Same as CAPM)
Size (SMB)
Book-to-Market Ratio (HML)
Empirical, not Theoretical
Slide5Size Factor
Small Firms Generating Higher Return
Not captured by CAPM
Small Minus Big (SMB):
Return on Small-Cap Stocks ─ Return on Large-Cap Stocks
Slide6Book-to-Market Ratio Factor
High Book-to-Market
Firms Generating Higher Return
Not captured by CAPM
High Minus Low (
HML):
Return on
High B/M
Stocks ─ Return on
Low B/M
Stocks
Slide7Fama-French Equation
E(
r
i
) = r
f
+
b
i
E
(
r
M
– r
f
) +
b
’
i
E
(SMB
) +
b
’’
i
E
(HML
)
r
f
= Risk Free Rate
r
M
= Return on Market
b
i
= Regression Coefficients
SMB = Small minus Big Size
HML = High minus Low M/B
Slide8Pros and Cons
Pros:
Empirical Support for Improved Performance
Explains a
Greater Proportion of
the
Non-Diversifiable Volatility
Cons
:
Not
Based on Theory
Factors
are
Highly Volatile
What
Do SMB
and HML ‘Capture’?
Adding
any
Variable to
a
Regression Increases
R-Squared
Slide9FIN 614: Financial ManagementLarry Schrenk, Instructor
Video 17 (Topic 3.7):
The Fama-French Model