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Fama-French five factor asset pricing model

By Rujeko Musarurwa

The relationship between risk and return has long been a topic for discussion and research. Investors and investment managers seek financial models that quantify risk and translate that risk into estimates of expected return on equity (Mullins, 1982). This post will look at and discuss the Fama-French five factor model and its applications. It will begin by discussing the theory and where the model originated from. A discussion of when and how the model is implemented and applied will then follow. Ultimately it will be seen that the five factor model is an improvement from previous models but that it still has some drawbacks and areas that can be improved on. Read more