Fama-French three-factor model
Recall that the CAPM has the following form:
Here, E() is the expectation, E(Ri) is the expected return for stock i, Rf is the risk-free rate, and E(Rmkt) is the expected market return. For instance, the S&P500 index could serve as a market index. The slope of the preceding equation (
) is a measure of the stock's market risk. To find out the value of , we run a linear regression. The Fama-French three-factor model could ...
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