FamaFrench

Fama-French refers to a family of asset pricing models and the corresponding factor portfolios developed by Eugene Fama and Kenneth French. The original Fama-French three-factor model, introduced in 1992, extends the Capital Asset Pricing Model by adding two empirically observed risk factors to the market portfolio: SMB and HML. SMB (small minus big) captures the size premium, reflecting higher average returns of small-cap stocks relative to large-cap stocks. HML (high minus low) captures the value premium, reflecting higher average returns of stocks with high book-to-market ratios relative to those with low book-to-market ratios. The model expresses expected excess return on a portfolio as a linear combination of the market excess return and the two factor returns, with coefficients (betas) estimated from historical data.

To construct the factors, the authors form portfolios sorted on size and value using U.S. stock data and compute the average returns of the small and big, and high and low book-to-market portfolios over time. They showed that SMB and HML help explain variations in expected stock returns that CAPM could not capture.

In 2015, Fama and French expanded the model to five factors by adding profitability (RMW) and investment (CMA) factors, aiming to capture differences in returns related to corporate profitability and investment patterns. The five-factor model remains widely used in academic research and in practical asset pricing and portfolio management as a benchmark for explaining cross-sectional returns.

Beyond the academic model, Fama-French factors have become standard reference factors in finance, with many funds and datasets offering factor-based tilts, risk premia explanations, and benchmarking. They are subject to ongoing debate regarding stability across markets, time periods, and data-snooping concerns.