Three-Factor Model

The Three-Factor Model is a way to explain why different investments perform differently. It suggests that three main factors influence a stock’s returns: 1) the overall market’s movement, 2) the company’s size (smaller companies tend to outperform larger ones), and 3) how much the stock’s returns fluctuate compared to the market (value stocks versus growth stocks). By considering these factors, investors can better understand and predict a stock’s performance beyond just looking at the overall market. This model helps explain why some stocks do better or worse than the general trend.