Fama–French Size and Book-to-Market Effects in Equity Returns

Summary

This excerpt introduces the Fama–French three-factor model as an extension of the Capital Asset Pricing Model. It focuses on two return patterns associated with the model: smaller companies have historically earned more than CAPM would predict, and stocks with higher book-to-market ratios have tended to outperform those with lower ratios. The text gives intuitive explanations, linking company size to risk and describing book-to-market as book equity divided by market value.

As evidence, it cites Fama and French’s study of US-listed stocks from 1963 to 1990, reporting a monthly return difference between the highest and lowest book-to-market groups. It also mentions a study of Chinese A-share stocks from 1993 to 2001 that found a book-to-market effect over holding periods of one, two, and three years. The excerpt promises practical strategy application to A-shares but does not include factor construction, portfolio rules, costs, risk controls, or full results. The cited historical patterns therefore do not establish that the effects persist or are directly investable.

Key ideas

• The Fama–French model extends CAPM by accounting for size and book-to-market patterns in returns.
• The size effect describes historically higher average returns among smaller companies.
• Book-to-market is calculated as book equity divided by market value.
• The excerpt cites historical evidence from US and Chinese A-share stocks.
• The supplied material does not specify factor portfolio construction or implementation costs.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.