Fama-French factor models
Compare three and five equity-factor benchmarks
The three-factor equity model combines market excess return with size and value factors, SMB and HML. The five-factor model adds profitability and investment factors, RMW and CMA. Factors are constructed portfolio return spreads; regressions estimate exposures and intercepts. These five equity factors differ from the three equity plus two bond factors considered in the 1993 paper.
Choose these for empirical return explanation, benchmark comparison or risk-adjusted performance analysis when factor definitions match the market and period. A five-factor model is not automatically superior for every asset set.
Strengths
- Extends market-only adjustment with economically interpretable return spreads
- Enables transparent comparison of benchmark-dependent alphas
Limitations
- Results depend on factor construction and geographic suitability
- Some portfolio patterns remain unexplained and factors may be correlated
Know the boundary
The 1993 paper’s five common stock-and-bond factors are not the 2015 five-factor equity model. Exposure estimates do not establish that characteristics causally determine returns.