Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases.
A)large market capitalization and high book-to-market ratio
B)large market capitalization and low book-to-market ratio
C)small market capitalization and high book-to-market ratio
D)small market capitalization and a book-to-market ratio of 1.0
E)small market capitalization and a low book-to-market ratio

Question

Quizplus · Accepted Answer

According to the Fama-French three-factor model, small companies and value companies (those with a high book-to-market ratio) tend to outperform large companies and growth companies in the long run. Therefore, the combination of small market capitalization and high book-to-market ratio is likely to produce the highest rate of return.

Which One of the Following Combinations Will Tend to Produce