The Fama-French three-factor model is based on
A) Standard deviation, beta and expected return
B) The risk-free rate, beta and the market risk premium
C) Company size, company industry and standard deviation
D) P/E ratio, beta and book-to-market ratios
E) Beta, company size and book-to-market ratios

Question

Quizplus · Accepted Answer

The Fama-French three-factor model is based on beta, company size, and book-to-market ratio. This model proposes that part of a security's return is due to the market as a whole, while another part is explained by the size of the company and the book-to-market ratio. Therefore, option E is the best choice. Options A, B, C, and D are incorrect because they do not include the factors used in the Fama-French three-factor model.

The Fama-French Three-Factor Model Is Based on