Risk-Return Analysis of Equity Portfolios: Comparison Between CAPM and Fama-French Three Factor Model

DOI

10.2991/978-94-6463-246-0_28How to use a DOI?

Keywords

Stock Returns; Portfolio Analysis; Factor Models; Complexity

Abstract

This article presents an empirical study that examines the explanatory power of these two models in asset portfolio management. The study analyzes the daily returns of 16 prominent companies in 11 industries and the SPDR S&P 500 from January 2012 to December 2021, using ordinary least squares regression to estimate model parameters. The descriptive statistics reveal diverse trends and patterns of returns over the ten-year period. The results suggest that the CAPM model explains only a small portion of the variation in stock returns, with low R-squared values, while the beta coefficients are significant. In contrast, the F-F model provides a improved fit for the data, with higher R-squared values and significant SMB and HML factors for several stocks. The article highlights the importance of carefully considering the choice of model for stock return analysis and discusses the trade-off between model complexity and explanatory power. To ensure the robustness of the findings, the study conducts robustness checks using different time periods and portfolio construction methods. In general, the study adds to the literature by providing empirical evidence on the performance of the CAPM and Fama-French three-factor models in explaining the daily returns of selected stocks. The findings suggest that the Fama-French three-factor model is more suitable for explaining the variation in stock returns than the CAPM model, providing valuable insights for asset portfolio management practitioners.

Copyright

© 2024 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Ziyan Tang
PY  - 2023
DA  - 2023/09/26
TI  - Risk-Return Analysis of Equity Portfolios: Comparison Between CAPM and Fama-French Three Factor Model
BT  - Proceedings of the 3rd International Conference on Economic Development and Business Culture (ICEDBC 2023)
PB  - Atlantis Press
SP  - 227
EP  - 237
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6463-246-0_28
DO  - 10.2991/978-94-6463-246-0_28
ID  - Tang2023
ER  -