The Fama-French three factor model predicts the expected return on a portfolio increases:
A)linearly with its factor loading of the size factor.
B)linearly with its factor loading of the volume.
C)exponentially with its factor loading of the size factor.
D)exponentially with its factor loading of the volume factor.
E)None of the above.

Question

Quizplus · Accepted Answer

The Fama-French three factor model states that the expected return on a portfolio increases linearly with its factor loading of the size factor, which measures the tendency of small-cap stocks to outperform large-cap stocks over time. The model also includes a factor for market risk and a factor for value, which measures the tendency of value stocks to outperform growth stocks over time.

The Fama-French Three Factor Model Predicts the Expected Return on a Portfolio