What does positive RMW mean?
What does positive RMW mean?
Finally, it should be noted that a positive value in RMW factor means that firms with higher profitability earn better results, not too counter-intuitive. Conservative minus Aggressive (CMA) stands for the difference in returns between firms with low and high investment policies.
What do SMB and HML mean?
Key Takeaways. Small minus big (SMB) is a factor in the Fama/French stock pricing model that says smaller companies outperform larger ones over the long-term. High minus low (HML) is another factor in the model that says value stocks tend to outperform growth stocks.
What are the 3 factors in the Fama-French model?
The Fama and French model has three factors: the size of firms, book-to-market values, and excess return on the market. In other words, the three factors used are SMB (small minus big), HML (high minus low), and the portfolio’s return less the risk-free rate of return.
What does negative HML mean?
High Minus Low (HML) is a value premium; it represents the spread in returns between companies with a high book-to-market value ratio and companies with a low book-to-market value ratio. Once the HML factor has been determined, its beta coefficient can be found by linear regression.
What is RMW and CMA?
Defined analogously to the HML factor, the profitability factor (RMW) is the difference between the returns of firms with robust (high) and weak (low) operating profitability; and the investment factor (CMA) is the difference between the returns of firms that invest conservatively and firms that invest aggressively.
What is Mkt RF in Fama-French?
Our independent variables are the five Fama-French. factors: Small Minus Big (SMB), High Minus Low (HML), Robust Minus Weak (RMW), Conservative Minus Aggressive (CMA), and the excess market return (MKTRF); CRSP’s.
What is RMW factor?
RMW (Robust Minus Weak) is the average return on the two robust operating profitability portfolios minus the average return on the two weak operating profitability portfolios, RMW = 1/2 (Small Robust + Big Robust) – 1/2 (Small Weak + Big Weak).
How do you read the Fama French three factor model?
The Fama-French Three-Factor Model Formula
- r = Expected rate of return.
- rf = Risk-free rate.
- ß = Factor’s coefficient (sensitivity)
- (rm – rf) = Market risk premium.
- SMB (Small Minus Big) = Historic excess returns of small-cap companies over large-cap companies.
How do you read the Fama-French three factor model?
What is Alpha in Fama-French 3 factor model?
The final variable of the Fama-French Three Factor model, “a,” represents the investment’s risk. This is more formally known as the investment’s alpha. This is a relatively rarely applied variable. Alpha measures an investment’s ability to beat the market.
