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

Relative to the Fama-French three-factor model, the Carhart model most likely adds a factor that is based on:

The Carhart model adds a momentum factor, winners minus losers, based on stocks' prior-period returns. It extends the Fama-French market, size and value factors. Profitability and investment factors are features of the Fama-French five-factor model rather than the Carhart four-factor model.

  1. Aprofitability differences between firms
  2. Bprior-period return performance of stocksCorrect
  3. Cdifferences in firms' investment policies

Explanation

Carhart extended the three-factor model with a momentum factor (WML, winners minus losers) formed from past returns, typically over the prior 12 months. Profitability and investment factors belong to the Fama-French five-factor model, not Carhart.

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