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Explain the Fama & French 3 factor model ? Estimation of expected return for individual stocks is central to many financial decisions such as those relating to portfolio management, capital budgeting, and performance evaluation. The two main alternatives available for this purpose are a single factor model (or Capital Asset Pricing Model (CAPM)) and the three factor model suggested by Fama and French. The CAPM's simplicity helps to build intuition around the concept of modeling return as a function of risk, under this model beta is a catch-all proxy for systematic risk. The CAPM's simplicity is also its greatest shortcoming, as the underlying assumptions limit its ability to explain and predict actual returns. It is obvious that there are a myriad of risk factors facing companies today. Some of these factors are market risk, bankruptcy risk, currency risk, supplier risk, etc.; and given that the CAPM uses a single factor to...

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