CFA Level I · CFA Level I Exam · The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models
In the Fama-French three-factor model, the SMB factor is most accurately described as the return on a portfolio of:
SMB (small minus big) is the return on a portfolio of small-cap stocks minus the return on a portfolio of large-cap stocks. It captures the size premium. The value factor is HML, and the momentum factor is the one that uses past returns.
- Asmall-cap stocks minus large-cap stocksCorrect
- Bstocks with high book-to-market minus low book-to-market
- Cstocks with high past 12-month returns minus low past returns
Explanation
SMB stands for Small Minus Big and is the return on small-capitalization stocks minus the return on large-capitalization stocks. The second option describes HML (value minus growth). The third describes the momentum factor added by Carhart.
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