Factor Models - Fama-French five factor model
6 important questions on Factor Models - Fama-French five factor model
What are the five factors in the Fama-French five factor model?
- Market
- Size
- Value (B/M)
- Profitability
- Investments
What is the conclusion about the rationalization?
- Book to market predicts returns
- Earnings predict returns
- Investments predict lower returns
How is the new Five factor factor RMW defined?
- Long-short on 30/40/30 sorts on Operating Profitability (30% long in higher OP, 30% short on lowest OP)
- Operating profitability = (Reveneus - COGS - interest expenses - selling, general, and administrative expenses)/book equity
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How is the new five factor factor CMA defined?
- Long-short on 30/40/30 sorts on investments
- Investments = Growth in total assets/total assets
What is the conclusion of the five factor model (double sorting)?
- Return falls when size increases (for size-OP portfolios)
- More investment, lower returns
- HML is redundant
What is the conclusion of the five factor model?
- vertical-alignvertical-alignvertical-alignvertical-alignWe looked at company characteristics and expected stock returns
- vertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignSize, B/M, Inv, and OP are important in explaining stock returns
- vertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignWe are able to reject the semi-strong form of market efficiency
- Next, we will be looking at past stock returns
- vertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignWll we be able to reject the weak-form market efficiency?
- vertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignvertical-alignWhy are the factors important?
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