Fama-French Three-Factor Model

The Fama-French Three-Factor Model is a financial framework used to explain stock returns. It builds on the idea that, in addition to market risk, two other factors influence a stock's performance: size and value. Specifically, it posits that smaller companies tend to outperform larger ones (the size effect) and that companies with lower price-to-earnings ratios (value stocks) tend to perform better than those with high ratios. By considering these factors alongside the overall market risk, the model aims to provide a more comprehensive understanding of how and why stocks behave the way they do.