Explain the relevance of the profitability factor in asset pricing models.

The profitability factor, introduced in the later Fama-French models, posits that companies with higher profitability tend to yield higher returns. This factor is relevant because it provides an additional dimension to asset pricing beyond market risk, size, and value. It suggests that more profitable companies, which efficiently generate higher earnings from their assets, are potentially better investments. Including the profitability factor in asset pricing models helps investors identify stocks that are not just undervalued but also fundamentally strong, enhancing portfolio performance.

Interview Questions Asset Pricing Profitability Factor

Unlock

Profitability Factor

Sorry, you don’t have access to this interview question. Sign up to practice with our wide range of interview questions or use the filters to find free examples!

Hint

Solution

Related Questions

Title	Category	Subcategory	Difficulty	Status
3-Factor and 5-Factor Models	Asset Pricing	Factor Models	Easy	Example
Factors vs. EMH	Asset Pricing	Factor Models	Easy	Unlock
Fama and French	Asset Pricing	Factor Models	Easy	Unlock
Macroeconomic Factors	Asset Pricing	Factor Models	Medium	Example
Significance of Factors	Asset Pricing	Factor Models	Easy	Unlock

Discussion

Please log in to see the discussion.

Product of Unknowns #1

Back to all Questions

Prospect Theory

The Interview Guide for Quants and Traders

The Interview Guide for Quants and Traders

Profitability Factor

Profitability Factor

Related Lectures

What do you think of this page?

Profitability Factor

Related Lectures

Careers

What do you think of this page?