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The Cross Section of Expected Stock Returns

Eugene FAMA and KEnneth FRENCH, 1992

The article can be found here

Following on Black Jensen Scholes 72 which indicates that stocks with higher $\beta$ have lower return, the authors embark to find alternative variables explaining the difference. The authors propose size and B/P ratio.

The three factors are

  • equity market
  • smb (small vs big mkt cap)
  • hml (high vs low book value / price ratio)


Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market $\beta$, size, leverage, book-to-market equity, and earnings-price ratios.