Fama French Three Factor Model

This video discusses the Fama-French three-factor asset pricing model.

The Fama-French Model is a three-factor model that shows how market risk, firm size, and book-to-market ratio affect the expected retursn of a security. The Capital Asset Pricing Model shows the expected return of a security as function of the security's systematic risk (measured by beta), but Gene Fama and Kenneth French noticed that small-cap stocks (companies with smaller market capitalizations) tended to outperform large-cap stocks and that companies with a higher book-to-market ratio (value stocks) tended to outperform companies with a lower book-to-market ratio (growth stocks). Fama and French incorporated these factors into a new asset pricing model, which shows the expected return of a security as a function not just of market risk but of firm size and the book-to-market ratio.

The additional factors added by Fama and French are typically written as SMB and HML, with SMB meaning "small minus big" and HML meaning "high minus low." SMB represents the return from going long on stocks that have lower market capitalizations and selling short stocks that have higher market capitalizations. HML represents the return from going long on firms that have higher book-to-market ratios and selling short firms that have lower book-to-market ratios.—
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[jc_]

Tomorrow is my exam and you just covered all I have to know. And this was uploaded just 2 days ago. How wonderful.

[extremeprankage]

Just a heads up to anyone watching, DFA doesn't exclude or short large cap stocks, they just underweight them when tilting their portfolios. They overweight small cap.

[AramBedoyan]

have an exam in a few hours and u saved me.

[abdulelahaloqayli]

This is helpful with CFA level ll - equity valuation
Many Thanks!

[mrmime]

@edspira Do you have any video explaining SMB and HML better? maybe MoM too :D

[bolbiiii]

Shoutout McLaughlin helping me with my econ exam even though hes not still at washU

[Pmarmagne]

Okay, I understand the concept but what do I do with it?

[kenkrak]

what is the cutoff between large and small companies? Did he put every company for eg. above 10b market cap in large and the rest in small?

[李冠标]

Thanks for your video. Could you please explain the Bmkt?

[AdsterG]

Anyone remember the last time value outperformed growth?

[Saywhatohno]

what if Return (high B/P) - Return (low B/P) = positive but the beta(HML) = negative, what does this mean. Beta

[Liberty_Freedom_Brotherhood]

what is the criteria for low book to market and what counts as small market cap? Someone answer please as I am still learning.

[investwithvincent]

What's the logic for deciding to go short on large-cap stocks and going long on the small-cap stocks?

[matthewang]

how do i find the Beta for SMB and HML?

[josev.]

High BTM stocks are growth stocks, and they usually underperform compared to value stocks or low BTM.