Fama-French Three-Factor Model
The Fama-French (1992) extension of CAPM that adds two factors beyond the market: SMB (small-minus-big, capturing size effect) and HML (high-minus-low book-to-market, capturing value effect). Expected return = Rf + beta_mkt * ERP + beta_SMB * SMB_premium + beta_HML * HML_premium. Used as an alternative to the build-up method for adjusting CAPM cost of equity on small-cap and value-tilted firms; structurally a substitute for the build-up size premium rather than a complement (using both is double-counting). Subsequent Fama-French five-factor (2015) adds profitability and investment factors.
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Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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