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𝐔𝐧𝐝𝐞𝐫𝐬𝐭𝐚𝐧𝐝𝐢𝐧𝐠 𝐑𝐢𝐬𝐤 𝐚𝐧𝐝 𝐑𝐞𝐭𝐮𝐫𝐧: 𝐂𝐀𝐏𝐌 𝐚𝐧𝐝 𝐅𝐚𝐦𝐚-𝐅𝐫𝐞𝐧𝐜𝐡 𝐓𝐡𝐫𝐞𝐞-𝐅𝐚𝐜𝐭𝐨𝐫 𝐌𝐨𝐝𝐞𝐥 This foundational paper by the Tuck School of Business demystifies two key models: The Capital Asset Pricing Model (CAPM) and The Fama-French Three-Factor Model for analyzing investment risks and returns. 🔍 𝐖𝐡𝐚𝐭’𝐬 𝐍𝐞𝐰? The paper explains the evolution from CAPM's single-factor model to the Fama-French framework, which incorporates size and value factors, offering a richer explanation of asset returns. 💡 𝐊𝐞𝐲 𝐈𝐧𝐬𝐢𝐠𝐡𝐭𝐬 𝐚𝐭 𝐚 𝐆𝐥𝐚𝐧𝐜𝐞: 𝐑𝐢𝐬𝐤-𝐑𝐞𝐭𝐮𝐫𝐧 𝐓𝐫𝐚𝐝𝐞𝐨𝐟𝐟: 1) CAPM links higher expected returns to systematic market risk (beta), providing a baseline for asset evaluation. The Fama-French model extends this by introducing size (SMB) and value (HML) factors to capture additional risks. 2) Diversification reduces unsystematic risk, emphasizing the importance of systematic factors in return predictions. Fund Manager Evaluation: 3) CAPM and Fama-French models can identify whether excess returns result from manager skill or mere exposure to risk factors. 📈 𝐏𝐫𝐚𝐜𝐭𝐢𝐜𝐚𝐥 𝐈𝐦𝐩𝐥𝐢𝐜𝐚𝐭𝐢𝐨𝐧𝐬: These models guide investors in constructing well-diversified portfolios, analyzing mutual funds, and making informed investment decisions based on risk-reward preferences. Source: https://shorturl.at/FMeq4 𝗘𝗻𝗷𝗼𝘆𝗲𝗱 𝗥𝗲𝗮𝗱𝗶𝗻𝗴 𝘁𝗵𝗶𝘀? Join a vibrant community of 10000+ finance and risk management professionals at Risk Inn 𝗦𝘁𝗮𝘆 𝗜𝗻𝗳𝗼𝗿𝗺𝗲𝗱 𝗮𝗻𝗱 𝗖𝗼𝗻𝗻𝗲𝗰𝘁𝗲𝗱 🤝  https://bit.ly/4dXIc2h (𝘞𝘦 𝘝𝘦𝘳𝘪𝘧𝘺) #finance #investing #riskmanagement #portfoliotheory #capm #famafrench #financialmodels #systematicrisk #unsystematicrisk #returns #investments #riskreturn #financialanalysis #mutualfunds #diversification #valueinvesting #growthinvesting #assetmanagement #beta #stockmarket #marketrisk #sizereffect #valuerisk #financialtheory #investmentstrategies