(Market Risk Premium): The excess return of the broad market over the risk-free rate (similar to CAPM).
The is a cornerstone of modern quantitative finance, designed to explain stock market returns more accurately than the traditional Capital Asset Pricing Model (CAPM). Developed by Nobel Laureate Eugene Fama and Kenneth French in 1992, the model adds two systematic risk factors— size and value —to the standard market risk factor. The Formula for Expected Returns
The "size factor," representing the historic outperformance of small-cap stocks over large-cap stocks.
The "value factor," representing the outperformance of high book-to-market (value) stocks over low book-to-market (growth) stocks. How to Download Fama-French Data
Rit−Rft=αi+β1(Rmt−Rft)+β2(SMBt)+β3(HMLt)+ϵitcap R sub i t end-sub minus cap R sub f t end-sub equals alpha sub i plus beta sub 1 open paren cap R sub m t end-sub minus cap R sub f t end-sub close paren plus beta sub 2 open paren cap S cap M cap B sub t close paren plus beta sub 3 open paren cap H cap M cap L sub t close paren plus epsilon sub i t end-sub
The model calculates expected returns using three key variables:
Accessing the actual historical data is essential for regression analysis, backtesting, or portfolio attribution. Kenneth R. French - Data Library
