Fama-French Model

The Fama-French model is a finance tool that helps explain stock returns. It expands on the traditional approach by looking at three key factors: market risk, company size, and value. First, it considers how the overall market performs. Then, it accounts for smaller companies, which often yield higher returns compared to larger ones. Lastly, it evaluates value stocks—those that appear cheap based on their fundamentals—versus growth stocks. By combining these factors, the model offers a more comprehensive view of what influences a stock's performance, aiding both investors and researchers in understanding market dynamics.