TITLE

Using Three-Factor Theory to Assess Investment Performance

AUTHOR(S)
Pollock, Steven L.
PUB. DATE
June 2007
SOURCE
Journal of Financial Planning;Jun2007, Vol. 20 Issue 6, p66
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
• In an effort to refine Sharpe's capital asset pricing model, Eugene Fama and Kenneth French advanced a three-factor model including risk premiums for size and value effects. In an effort to make this theory more accessible to practitioners, this article describes factor loading, expected return, and the determination of alpha that result from three-factor regression analysis. • When exposure to the size and value premiums is considered, the returns of most active mutual fund managers are no greater than that which is predicted by the three-factor model. This would suggest that similar investment returns may be achieved through passive strategies with targeted exposure to the risk factors. • Among all domestic equity funds, the occurrence of statistically significant alpha over trailing 10- and 15-year periods was extremely rare when measured against the three-factor model. The few funds that did outperform expectations have typically done so in isolated periods. • Although the records of some mutual funds have appeared to be robust relative to existing benchmarks, they typically capture no more return than a passively managed portfolio with similar three-factor characteristics.
ACCESSION #
25309671

 

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