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Empowered Investor: A Guide to Building Better
Portfolios by Keith Matthews
Price $15.95>> 
 Investment
Principle #3: Realize that Risk Drive Returns
The Fama/French Three-Factor Model
Now that you are aware of the benefits of asset class investing
and portfolio theory, how do you go about implementing these concepts
into your portfolio? Which asset classes should you include and
in what proportion? Once again, it is the academic researchers who
can shed light on these difficult questions.
In June 1992, Eugene Fama of the University of Chicago and Kenneth
French of Dartmouth College published a landmark study entitled
“The Cross Section of Expected Stock Returns” in the
Journal of Finance. By identifying market, size and value in returns,
they developed a three- factor model in gauging returns relative
to risk.
Their analysis of the sources of investment risk and return has
reshaped portfolio theory and greatly improved the understanding
of the factors that drive performance. The Fama/French model revolutionized
the way we can construct and analyze asset class portfolios and
is an invaluable tool for asset allocation and portfolio analysis.
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