Fama French Carhart Model

This video discusses the Fama-French-Carhart asset pricing model.

The Fama-French-Carhart model is a four-factor model that shows how market risk, firm size, book-to-market ratio, and momentum affect the expected returns of a security. Market risk, firm size, and the book-to-market ratio are the three factors that were present in the earlier model developed by Gene Fama and Kenneth French. Mark Carhart added the fourth factor, momentum, to this model.

The size and book-to-market ratio factors added by Fama and French account for the fact that small-cap stocks tended to outperform large-cap stocks and that high book-to-market ratio firms tended to outperform low book-to-market ratio firms historically. The momentum factor accounts for the tendency of firms with higher returns over the prior year to outperform firms with lower returns over the prior year.—
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