Fama and French five-factor model

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As described by Eugene F. Fama and Kenneth R. French, there are five common risk factors in the return on stocks and bonds.[1][2]

  • Three stock market factors: An overall market factor, and two factors related to firm size and book-to-market equity.
  1. Equity risk
  2. Value risk
  3. Size risk
  • Two bond market factors, related to maturity and default risks
  1. Term risk
  2. Default risk

The Fama and French 5-Factor Model is not a predictive tool, it is an explanatory tool. It shows where portfolio return came from. It’s not possible to know how large the risk premiums will be from each of the five risks in the future. Thus, the model is not predictive.[3]

Five factor asset pricing model

In 2013, Fama and French introduced a five-factor asset pricing model, adding profitability and investment factors to augment the three-factor model.[4]. Dimensional Fund Advisors (DFA) is adding the profitability and investment loading factors to a number of its equity asset class funds. [5]

See also

References

  1. "Common Risk Factors in the Returns on Stocks and Bonds". Journal of Financial Economics, Vol 33, Number 56. 1993. Viewed 25-Jul-2012.
  2. Few more articles, forum discussion by member Robert T.
  3. Rick Ferri (July 23, 2012). "The Five Dimensions of Risk". Forbes. https://www.forbes.com/sites/rickferri/2012/07/23/the-five-dimensions-of-risk.
  4. Fama, Eugene F. and French, Kenneth R., A Five-Factor Asset Pricing Model. (November 2013). Fama-Miller Working Paper. Available at SSRN.
  5. Research, DFA

External links

Bibliography