Dr. P.V. Viswanath

 

pviswanath@pace.edu

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Estimating Required Rate of Return
P.V. Viswanath, 2008

 
 


 
 

Fama-French factors

Description of Fama/French Benchmark Factors (from http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/f-f_bench_factor.html)

The Fama/French benchmark factors, Rm-Rf, SMB, and HML, are constructed from six size/book-to-market benchmark portfolios that do not include hold ranges and do not incur transaction costs.

Rm-Rf, the excess return on the market, is the value-weighted return on all NYSE, AMEX, and NASDAQ stocks (from CRSP) minus the one-month Treasury bill rate (from Ibbotson Associates).

SMB (Small Minus Big) is the average return on three small portfolios minus the average return on three big portfolios,

SMB = 1/3 (Small Value + Small Neutral + Small Growth)
- 1/3 (Big Value + Big Neutral + Big Growth).

HML (High Minus Low) is the average return on two value portfolios minus the average return on two growth portfolios,

HML = 1/2 (Small Value + Big Value)
- 1/2 (Small Growth + Big Growth).

See Fama/French, 1993, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics, for a complete description of the factor returns.


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