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CFA Level I · CFA Level I Exam · The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models

Compared with the CAPM, multifactor models such as the Fama-French model are most likely to:

Multifactor models such as Fama-French explain more of the variation in security returns by adding systematic risk exposures, such as size and value, to market beta. The CAPM uses a single beta, and both approaches still require a risk-free rate.

  1. Arely on a single market beta to explain all cross-sectional return differences
  2. Bexplain more of the variation in security returns by including additional systematic risk exposuresCorrect
  3. Celiminate the need to estimate a risk-free rate when computing expected returns

Explanation

Multifactor models add factors such as size and value to market risk, so they typically explain more return variation than the CAPM. A single beta describes the CAPM, and the risk-free rate is still needed.

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