Fama-French Market Beta

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Definition

The Fama-French Market Beta is used in the Fama-French Three Factor Model. This model, known as a "three factor model", is sometimes seen as a successor to the CAPM model devised by Sharpe, Treynor, Lintner.

Eugene Fama and Kenneth French pioneered the use of the three-factor model after questioning the validity of the CAPM model in the real-world. The CAPM model predicted expected returns based on an asset's beta (correlation to the underlying market's returns), along with the risk-free rate and idiosyncratic risk (variants of the CAPM). (See our related terms, CAPM).

Fama and French argued that a security's returns were dependent not only on a market beta, but also market capitalization beta and value beta. These additional factors were illustrated with SMB (Small minus Book, to represent market capitalization) and HML (High minus Low, to represent value).

Fama-French Market Beta is the beta used for the Market Risk Premium (CAPM also uses a Market Risk Premium Beta, but the FF Market Beta and CAPM Beta are not interchangeable, as CAPM uses a single beta for expected returns, whereas Fama-French uses three betas.)

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