The Fama-French three-factor model of expected returns includes the following three factors:
A)the market risk premium,the size of firms and the risk free rate.
B)the risk free rate,the market risk premium and price earnings ratios.
C)the market risk premium,the size of firms and book-to-market ratios.
D)the market risk premium,the risk free rate and book-to-market ratios.

Question

Quizplus · Accepted Answer

The Fama-French three-factor model includes the market risk premium (as in all asset pricing models), as well as the size of firms and their book-to-market ratios. The model asserts that these two additional factors explain the variation in expected returns beyond the market risk. Therefore, the correct answer is C, which includes the market risk premium, the size of firms, and book-to-market ratios. The other answer choices either omit a required factor or include an irrelevant one.

The Fama-French Three-Factor Model of Expected Returns Includes the Following