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An asset pricing model that explains excess returns via market, size, and value factors.
An asset pricing model that explains excess returns via market, size, and value factors.
Developed by Eugene Fama and Kenneth French (1992, 1993), the three-factor model extends CAPM with two empirical factors: SMB (Small Minus Big, the size premium) and HML (High Minus Low, the value premium measured by book-to-market). The model is the workhorse benchmark for explaining cross-sectional equity returns and forms the basis of the Fama-French 5-factor and Carhart 4-factor extensions.
Value (HML) and Size (SMB) premia are persistent anomalies in international samples.
Alpha with respect to the three factors is the standard measure of active equity skill.
Foundation of the Fama-French 5-factor model (2015) which adds profitability and investment.
Portfolio optimization is the construction of an asset allocation that maximises risk-adjusted return subject to investor constraints. The classical framework is mean-variance optimisation (Markowitz, 1952); the modern framework is factor-based, with the portfolio constructed to express a target set of factor exposures and to harvest the corresponding risk premia.
Quantitative research is the disciplined process of turning a financial hypothesis into a validated, deployable trading model. It spans data engineering, signal design, backtesting with proper out-of-sample validation, and ongoing production monitoring. The discipline's central problem is overfitting: most strategies that pass backtests fail in production.