A New 4 Factor Investing Model
For about three decades, the working asset pricing model was the capital asset pricing model (CAPM), with beta—specifically market beta—being its sole factor. Then, in 1993, the Fama-French three-factor model—which added size and value—replaced the CAPM as the workhorse model.
By eliminating two major anomalies (the outperformance of small stocks and of value stocks), it improved the model’s explanatory power from about two-thirds of the differences in returns of diversified portfolios to more than 90%. Thus, it was a major advance.
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