The authors examine how common risk factors explain stock and bond returns. They identify five factors tied to the market, company size, relative book value, bond maturity, and default risk, suggesting market exposure alone misses important differences in average returns across securities.
Common Risk Factors in the Returns on Stocks and Bonds
Kenneth French, Eugene Fama
Research
54 Pages
Key Takeaways
Value Premium: Stocks with high book values relative to market prices outperformed their low ratio counterparts by an average 0.40% monthly.
Size Evidence: Small stocks outperformed large stocks by an average 0.27% monthly, although the premium lacked strong statistical significance.
Model Explanatory Power: The three stock factors typically explained over 93% of portfolio return variation, though formal tests still rejected the model.
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