THE IMPACT OF SIZE AND VALUE FACTORS THROUGHOUT ASSET PRICING MODELS

Open Access
Author:
Rhea, Kayla
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Robert Wesley Everett Jr., Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
Keywords:
  • Finance
  • Asset Pricing Models
  • Capital Asset Pricing Model
  • Fama French Three-factor Model
  • Linear Regression
Abstract:
This paper aims to analyze statistical data in support of the hypothesis that the Fama French Three-factor Model (FF3FM) will better describe the risk-return relationship of a portfolio than the Capital Asset Pricing Model (CAPM). That is, if the portfolio embodies specific characteristics the Fama French Three-factor Model provides compensation for. These characteristics are related to portfolio size and value as those are the two additional factors the Fama French Three-factor Model uses to describe the risk-return relationship in comparison to the Capital Asset Pricing Model. The CAPM solely relies on the portfolio’s market sensitivity to predict its return. Through the results of eight linear regressions, this paper will demonstrate that the FF3FM describes the risk-return relationship better than the CAPM for US value and small-cap heavy portfolios’ weekly returns over the past three years.