3-factor and 5-factor

Factor models
In what ways do the Fama-French three-factor and five-factor models expand upon CAPM?



The Fama-French models expand upon CAPM by introducing additional factors to explain asset returns. The three-factor model adds size (small minus big, SMB) and value (high minus low, HML) factors to the market risk factor in CAPM. The five-factor model further includes two more factors: profitability (robust minus weak, RMW) and investment (conservative minus aggressive, CMA). These models acknowledge that factors like company size, book-to-market value, profitability, and investment patterns also play a significant role in determining stock returns, beyond just market risk.