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Risk and return III: The three-factor model
- A quick review of the CAPM
- The size and value premiums
- Three-factor model: Overview
- Three-factor model: Implementation
- Three-factor model: Application
- An alternative use of the model
- The big picture
- Excel section
The CAPM we discussed in the previous chapter states that the only variable that matters when estimating a company’s required return on equity is systematic risk measured by beta. That’s a very strong statement, particularly when the empirical evidence points to other variables that seem to be clearly correlated to returns. Two of these variables are market capitalization and the book-to-market ratio, which can be articulated, together with beta, into the increasingly-popular three-factor ...
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