Understanding Risk and Return, the CAPM, and the Fama-French Three-Factor Model

ArXiv ID: ssrn-481881 “View on arXiv”

Authors: Unknown

Abstract

No abstract found

Keywords: N/A, Insufficient Data, No Abstract

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 3.0/10
• Quadrant: Lab Rats
• Why: The paper introduces and derives the mathematical formulas for the CAPM and beta, involving covariance and variance calculations, which is moderately complex. However, it lacks backtest results, code, or heavy implementation details, relying primarily on conceptual explanation and historical data charts for illustration rather than rigorous empirical testing.

  flowchart TD
    A["Research Goal: Understand Risk & Return<br>Test CAPM vs. Fama-French Model"] --> B{"Data Collection & Preparation"}
    B --> C["CRSP & Compustat Datasets"]
    C --> D["Market, Size, Value Factors"]
    D --> E["Portfolio Formation<br>Size/BM Sorted Portfolios"]
    E --> F["Computational Analysis<br>Time-Series Regressions"]
    F --> G["Key Outcomes"]
    G --> H["CAPM Fails to Explain<br>Returns (Size & Value Effects)"]
    G --> I["Fama-French 3-Factor Model<br>Significantly Improves Fit"]