Constructing Fama–French Market, Profitability, and Investment Factors
Summary
The document asks how to assign market risk premium, RMW, CMA, and momentum exposures to an individual stock, given that the author already computes firm size from equity market value. The included answer redirects the reader to established factor data and describes the factors as portfolio returns rather than standalone firm characteristics. It defines the market factor as a broad US equity market return less the one-month Treasury bill rate. RMW is the average return on robust-profitability portfolios minus weak-profitability portfolios, while CMA compares conservative-investment portfolios with aggressive-investment portfolios.
The answer says to use monthly returns and points to the established factor library for published series. It notes that factor portfolios are formed using profitability and investment classifications, with broad percentile breakpoints, and that researchers without a supplied country series would need to construct the portfolios themselves. The response does not provide a full construction recipe, the MOM definition, stock-level regression steps, or details for non-US data. It distinguishes factor returns used as regression variables from a particular stock’s estimated factor loadings.
Key ideas
- The market factor is an excess return formed by subtracting the risk-free rate from a broad market return.
- RMW compares returns on robust and weak operating-profitability portfolios.
- CMA compares returns on conservative and aggressive investment portfolios.
- Factor series are portfolio-level regression inputs; a stock’s exposure is estimated separately.
- Researchers may need to form their own factor portfolios where published regional series are unavailable.
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Full text
# How can I calculate Fama-French Beta, RMW and CMA factor for a particular stock?
# How can I calculate Fama-French Beta, RMW and CMA factor for a particular stock?
I already have a method of calculating Size: the natural logarithm of the market value of equity at the end of the fiscal year.
But how to account for the Market Risk Premium, RMW, CMA and MOM factor for each particular stock?
In the methodology I want to replicate, the following variable is stated in the Factor-model regression:
https://i.sstatic.net/SKMBy.png
## Answer by zglin (score 2)
https://quant.stackexchange.com/a/33736
Use monthly returns and follow Ken French's website. RMW, CMA, and MOM are all calculated in depth on a near daily basis. From his Dartmouth data library.
MRP
> Rm-Rf, the excess return on the market, value-weight return of all CRSP firms incorporated in the US and listed on the NYSE, AMEX, or NASDAQ that have a CRSP share code of 10 or 11 at the beginning of month t, good shares and price data at the beginning of t, and good return data for t minus the one-month Treasury bill rate (from Ibbotson Associates).
RMW
> RMW (Robust Minus Weak) is the average return on the two robust operating profitability portfolios minus the average return on the two weak operating profitability portfolios,
```
RMW =
1/2 (Small Robust + Big Robust)
- 1/2 (Small Weak + Big Weak).
```
CMA
> CMA (Conservative Minus Aggressive) is the average return on the two conservative investment portfolios minus the average return on the two aggressive investment portfolios,
```
CMA =
1/2 (Small Conservative + Big Conservative)
- 1/2 (Small Aggressive + Big Aggressive).
```
Portfolio construction is done based on broadly 70/30 percentile for each of these factors. If you are looking at US returns this has all been calculated, if you are looking at international returns (for some obscure country where they haven't done this), you will define your own portfolio mixes.Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.