Farma French Long Marker

Question 1

5 factors of the Farma French

Answer 1

size, value, profitability, investment and market

Question 2

Explain size factor and how provide a rational risk-based interpretation

Answer 2

Small companies tend to do better than big ones. This factor looks at how much better small companies do compared to big ones by looking at their market value. Small companies are riskier, so investors want more return for investing in them.

Question 3

Explain value factor and how provide a rational risk-based interpretation

Answer 3

Value (HML): Companies that are cheap relative to their assets tend to do better than expensive ones. This factor measures how much better these cheap companies do compared to expensive ones by comparing their book value to their market value. Cheap companies are riskier, so investors want more return for investing in them.

Question 4

Explain profitability factor and how provide a rational risk-based interpretation

Answer 4

Profitability (RMW): Companies that make more money tend to do better. This factor checks how much better these profitable companies do compared to less profitable ones by looking at their earnings. Companies that make more money are safer, so investors are okay with getting less return for investing in them.

Question 5

Explain investment factor and how provide a rational risk-based interpretation

Answer 5

Companies that invest less tend to do better. This factor measures how much better these low-investment companies do compared to high-investment ones by checking their spending on things like assets. Companies that invest less are safer, so investors are okay with getting less return for investing in them.

Question 6

Explain market factor and how provide a rational risk-based interpretation

Answer 6

This is the basic market risk. It measures how much the overall market affects stock returns compared to a risk-free investment. This is the basic risk of the market. Investors want extra return for taking on this risk.