High Minus Low (HML)
Contents
Demystifying High Minus Low (HML): Understanding the Value Premium
High Minus Low (HML), often dubbed the value premium, is a crucial factor in investment analysis. Let's delve into what HML entails, its significance in the Fama-French three-factor model, and its implications for portfolio management.
Unlocking the Essence of High Minus Low (HML)
HML, part of the renowned Fama-French three-factor model, measures the spread in returns between value and growth stocks. Coined by economists Eugene Fama and Kenneth French, this model highlights the outperformance of value stocks, characterized by high book-to-market ratios, over growth stocks with lower book-to-market values.
Deciphering the Fama-French Three-Factor Model
The Fama-French model, conceived in 1992, integrates HML along with other factors to analyze portfolio returns comprehensively. It recognizes that a portion of portfolio performance stems from factors beyond managers' control, including the historical tendency of value and small-cap stocks to outperform their counterparts.
The Evolution to Fama and French’s Five-Factor Model
In 2014, Fama and French expanded their model to include two additional factors: profitability and investment. These additions aim to capture companies' future earnings and investment strategies, offering a more nuanced perspective on stock market returns.
Exploring HML Finance FAQs
Why Is Fama French Better than CAPM?
The Fama-French model surpasses the Capital Asset Pricing Model (CAPM) by addressing its limitations. Empirical studies demonstrate its efficacy in explaining expected returns, especially in portfolio selection scenarios.What Does the HML Beta Mean?
The HML beta represents the portfolio's exposure to the value premium. A positive beta indicates alignment with value stocks, while a negative beta suggests a resemblance to growth-oriented portfolios.