Python for Finance - Second Edition

Chapter 7. Multifactor Models and Performance Measures

In Chapter 6, Capital Asset Pricing Model, we discussed the simplest one-factor linear model: CAPM. As mentioned, this one-factor linear model serve as a benchmark for more advanced and complex models. In this chapter, we will focus on the famous Fama-French three-factor model, Fama-French-Carhart four-factor model, and Fama-French five-factor model. After understanding those models, readers should be able to develop their own multifactor linear models, such as by adding Gross Domestic Product (GDP), Consumer Price Index (CPI), a business cycle indicator or other variables as an extra factor(s). In addition, we will discuss performance measures, such as the Sharpe ratio, Treynor ratio, and ...