Eugene Fama from the University of Chicago and Kenneth R. French from the Yale School of Management examined the validity of the Capital Asset Pricing Model (CAPM) in a study that was published in...

Eugene
Fama from the University of Chicago and Kenneth R. French from the Yale School
of Management examined the validity of the Capital Asset Pricing Model (CAPM)
in a study that was published in 1992.
The CAPM is the most recognized model to explain stock price returns and
forms the foundation of Modern Portfolio Theory. Their extensive study showed that, at
minimum, the CAPM was not a complete explanation of the factors explaining
asset pricing. Their findings also have
some implications for investment performance of growth versus value
stocks. A summary of their key findings
can be found in
Rethinking Stock Returns.
After reading this summary, answer the
following questions:

1)




How
did the researchers in the article “Rethinking Stock Returns” define value
versus growth stocks? What relevance did
their findings have on investing?

2)




What
factors did Fama and French examine that may explain stock returns?

3)




The
CAPM is built on a single measure of risk that explains asset returns. What measures of risk did Fama and French
conclude were necessary to explain stock returns?

4)




Describe
the CAPM model and the Fama and French model and the implications of these
models for investors.