Skip to content

FRM Part I · FRM Exam Part I · The Arbitrage Pricing Theory and Multifactor Models of Risk and Return

In the Fama-French three-factor model, the SMB factor is constructed to capture which of the following?

SMB (Small Minus Big) measures the return on small-capitalization stocks minus the return on large-capitalization stocks. It captures the size premium. The book-to-market spread is HML and the winner-loser spread is momentum.

  1. AThe return difference between small-capitalization and large-capitalization stocksCorrect
  2. BThe return difference between high book-to-market and low book-to-market stocks
  3. CThe return difference between past winners and past losers
  4. DThe excess return of the market portfolio over the risk-free rate

Explanation

SMB stands for Small Minus Big and is the return on a portfolio of small-cap stocks minus the return on a portfolio of large-cap stocks. The high-minus-low book-to-market spread is HML, not SMB. Momentum is a separate factor added in the Carhart extension.

Did you get it right without looking?

One question tells you little. A timed set on The Arbitrage Pricing Theory and Multifactor Models of Risk and Return shows your real accuracy, how long you take and where you lose marks.

Practise The Arbitrage Pricing Theory and Multifactor Models of Risk and ReturnFree diagnostic mock

More The Arbitrage Pricing Theory and Multifactor Models of Risk and Return questions