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

Which statement about the Fama-French five-factor extension is correct?

The Fama-French five-factor model adds profitability (robust minus weak) and investment (conservative minus aggressive) factors to the market, size and value factors. Momentum belongs to the Carhart extension rather than this model.

  1. AIt adds profitability and investment factors to the market, size and value factorsCorrect
  2. BIt adds momentum and liquidity factors to the three-factor model
  3. CIt replaces the market factor with a size factor
  4. DIt removes the value factor because book-to-market is redundant

Explanation

The five-factor model adds a profitability factor (robust minus weak) and an investment factor (conservative minus aggressive) to market, SMB and HML. Momentum is in the Carhart model, not the Fama-French five-factor model.

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