Eugene Fama and Kenneth French extended the Capital Asset Pricing Model (CAPM) by documenting that cross-sectional equity returns are driven by more than market beta alone.
Three-factor model (1993)
- Mkt-RF — market excess return (the original CAPM factor)
- SMB (Small Minus Big) — small-cap stocks have historically earned higher risk-adjusted returns than large-cap stocks
- HML (High Minus Low) — value stocks (high book-to-market ratio) have historically outperformed growth stocks (low book-to-market)
Five-factor model (2015)
Added two further factors to better explain the cross-section of equity returns:
- RMW (Robust Minus Weak) — profitable firms outperform unprofitable firms
- CMA (Conservative Minus Aggressive) — low-investment firms outperform high-investment firms
The Fama-French factors serve as standard benchmarks for factor attribution: a strategy with positive alpha after controlling for these factors has demonstrated skill beyond known documented premia. Factor data is publicly available from the French data library.