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박재훈투영인 프로필 사진박재훈투영인
Fama-French’s Cross-Sectional Analysis of Expected Stock Returns (Apr 30, 2012)
created At: 3/19/2025
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Neutral
This analysis was written from a neutral perspective. We advise you to always make careful and well-informed investment decisions.
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Fact
CAPM’s failure: Beta alone does not explain stock returns. Size Effect: Small-cap stocks outperform large-cap stocks on average. Value Effect: High B/M (“value”) stocks outperform low B/M (“growth”) stocks. Beta’s role diminishes: Once Size and B/M are considered, beta’s significance disappears. Multi-Factor Model introduced: Fama-French’s Three-Factor Model (Market, Size, Value) became a standard in asset pricing.
Opinion
Fama and French (1992) fundamentally reshaped asset pricing by proving that market beta alone cannot explain stock returns. Their research established the Size and Value effects as key drivers of returns, challenging CAPM’s core premise. The study also laid the groundwork for multi-factor models, which continue to evolve today. Notably, the Size effect is often attributed to higher risk from illiquidity and information asymmetry, while the Value effect suggests undervalued stocks tend to outperform over time.
Core Sell Point
Fama-French’s research disproved CAPM’s reliance on beta and introduced the Size and Value factors, which led to the development of multi-factor models that transformed modern investing strategies.

This seminal paper challenged the Capital Asset Pricing Model (CAPM) in the early 1990s, reshaping modern financial economics. Fama and French empirically demonstrated that CAPM’s assumption of a linear relationship between beta (β) and returns does not hold in real-world data. Instead, they identified firm size (Size) and book-to-market equity (B/M) as more significant factors in explaining stock returns.

1. CAPM’s Limitations

  • CAPM Assumption: Expected stock returns should be determined solely by market beta—higher beta implies higher returns.

  • Empirical Evidence: Analyzing U.S. stock data (1963-1990), the study found little to no correlation between beta and stock returns. In some cases, beta even exhibited a negative relationship with returns.

  • Challenges in Beta Measurement: Even after refining beta estimation methods (e.g., portfolio construction based on size and beta), the CAPM’s predictions remained unsupported.

2. Discovery of Size and Value Effects

  • Size Effect: Small-cap stocks consistently outperformed large-cap stocks, contradicting CAPM’s risk-return assumption.

  • Value Effect: Stocks with a high book-to-market ratio (B/M), or “value stocks,” generated higher returns than low B/M (“growth”) stocks.

  • Empirical Evidence: Size and B/M strongly explained variations in stock returns, rendering beta’s role insignificant when included in the model.

3. Implications for Asset Pricing Models

  • Diminished Role of Beta: Once Size and B/M were considered, beta lost explanatory power in return predictions.

  • Multi-Factor Model: Fama and French proposed a three-factor model (Market + Size + Value) to replace CAPM, which became the foundation for modern asset pricing models.

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