Exercise

# The Fama French 3-factor model

The Fama-French model famously adds two additional factors to the CAPM model to describe asset returns:

$$ R_{P} = RF + \beta_{M}(R_{M}-RF)+b_{SMB} \cdot SMB + b_{HML} \cdot HML + \alpha $$

- SMB: The small minus big factor
- \(b_{SMB}\): Exposure to the SMB factor
- HML: The high minus low factor
- \(b_{HML}\): Exposure to the HML factor
- \(\alpha \): Performance which is unexplained by any other factors
- \(\beta_{M}\): Beta to the broad market portfolio B

The `FamaFrenchData`

DataFrame is available in your workspace and contains the `HML`

and `SMB`

factors as columns for this exercise.

Instructions

**100 XP**

- Define a regression model that explains
`Portfolio_Excess`

as a function of`Market_Excess`

,`SMB`

, and`HML`

. - Extract the adjusted r-squared value from
`FamaFrench_fit`

.