Exercise

The 5-factor model

In 2015, Fama and French extended their previous 3-factor model, adding two additional factors:

  • RMW: Profitability
  • CMA: Investment

The RMW factor represents the returns of companies with high operating profitability versus those with low operating profitability, and the CMA factor represents the returns of companies with aggressive investments versus those who are more conservative.

The FamaFrenchData object is available in your workspace and contains the RMW and CMA factors in addition to the previous factors.

Instructions

100 XP
  • Use what you've learned from the previous exercises to define the FamaFrench5_model regression model for Portfolio_Excess against the original 3 Fama-French factors (Market_Excess, SMB, HML) in addition to the two new factors (RMW, CMA).
  • Fit the regression model and store the results in FamaFrench5_fit.
  • Extract the adjusted r-squared value and assign it to regression_adj_rsq.