FRM Part I · FRM Exam Part I · The Arbitrage Pricing Theory and Multifactor Models of Risk and Return
Compared with the three-factor model, the Fama-French five-factor model adds which pair of factors?
The Fama-French five-factor model adds profitability (RMW, robust minus weak) and investment (CMA, conservative minus aggressive) to the market, size and value factors. Momentum is not part of it; it belongs to the Carhart four-factor extension.
- AProfitability (RMW) and investment (CMA)Correct
- BMomentum (UMD) and liquidity
- CProfitability (RMW) and momentum (UMD)
- DInvestment (CMA) and low volatility
Explanation
The five-factor model augments market, SMB and HML with RMW (robust minus weak profitability) and CMA (conservative minus aggressive investment). Momentum is in the Carhart extension, not the Fama-French five-factor model.
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