FAMA-FRENCH THREE-FACTOR CAPITAL ASSET PRICING MODEL 1
Fama-French Three-Factor Capital Asset Pricing Model
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FAMA-FRENCH THREE-FACTOR CAPITAL ASSET PRICING MODEL 2
Date of Submission: XXXXXXXXXXXXXXXXXX
Table of Contents
Abstract………………………………………………………………………………………………….…….….…….….….3
Introduction to the Three-Factor Model Models…………………………………………………..…….…...4
What the Model Explains………………………………………………………………………………………………..5
Normative Implications of the Model…………………………………………………………….….….…….…..8
References………………………………………………………………………………………………………………………9
Appendix A……………………………………………………………………………………………………..….…….….10
Appendix B………………………………………………………………………………………………….….….…….….11
FAMA-FRENCH THREE-FACTOR CAPITAL ASSET PRICING MODEL 3
Abstract
The following is a XXXXXXXX research paper submitted by XXXXX. The purpose of the
paper is to introduce graduate finance students to the Three Factor Asset Pricing Model
developed by Eugene F. Fama and Kenneth R. French.
FAMA-FRENCH THREE-FACTOR CAPITAL ASSET PRICING MODEL 4
Introduction to the Three-Factor Model Models
One assumption of this paper is that the reader is familiar with, and has a basic
understanding of, the Capital Asset Pricing Model (CAPM) developed by William Sharpe (1964)
and John Lintner (1965) which marks the birth of asset pricing theory (Fama, E.F and French,
K.R., 2004, p.1). The CAPM is a Single-Factor Market Model which states:
(CAPM) E(Ri) = Rf + [E(Rm) – Rf)]*βim, I = 1,…, N.
The expected return on any asset (i), E(Ri) is the risk-free interest rate Rf, plus a risk
premium, the asset’s market beta, βim, times the premium per unit of beta risk, E(Rm) – Rf.
Fama and French argue that, although the CAPM theory has been the standard taught for
several decades since its inception; it is based on faulty and unrealistic assumptions of
