Carhart Four-Factor Model

The Carhart Four-Factor Model is a way to evaluate how actively managed stock portfolios perform. It builds on three main factors—market risk, company size, and value versus growth—and adds a fourth: momentum, which is the tendency of stocks that have performed well recently to continue performing well. By considering these four factors, investors can better understand whether a portfolio's returns come from genuine skill or just following common market trends. Essentially, it helps distinguish between skillful management and luck in investment performance.