Fama and French ["The Cross-Section of Expected Stock Returns," Journal of Finance 1992] model the relative financial distress factor as ______.
A) the book value of equity
B) the market value of equity
C) the difference in mean return between the smallest 10 percent of firms and the largest 10 percent of firms
D) the difference in mean return between value and growth stock portfolios
E) None of the above

Question

Quizplus · Accepted Answer

The Fama and French model includes a factor that captures the difference in mean returns between value stocks (high book-to-market ratios) and growth stocks (low book-to-market ratios), which is effectively the difference in mean return between value and growth stock portfolios.