Fama-French factors: Answer Guide 2027

The Fama-French factors extend CAPM by explaining stock returns with multiple systematic exposures: market, size (SMB), value (HML), and in the five-factor version, profitability (RMW) and investment (CMA). In a Fama French interview, name the factors, explain what each captures, and state the model's purpose.

Fama French Interview Questions: What They Test

The 1993 three-factor model added SMB (small minus big — the size premium) and HML (high minus low book-to-market — the value premium) to the market factor, dramatically improving CAPM's explanatory power for cross-sectional returns. The 2015 five-factor version added RMW (robust minus weak profitability) and CMA (conservative minus aggressive investment).

Interviewers want the interpretation: each factor is a long-short portfolio return, and a stock's expected return equals its exposures (betas) times the factor premia. The deeper question is what the factors mean — risk exposures demanding compensation, or anomalies from mispricing. Either way, the model is the workhorse for performance attribution: did the manager generate alpha, or just load up on value and size?

How to Answer a Fama French Interview Question

• State the purpose. "Explaining cross-sectional stock returns better than single-factor CAPM — the standard attribution framework."
• Name the factors. "Market, SMB (size), HML (value), plus RMW (profitability) and CMA (investment) in the five-factor version."
• Explain the construction. "Each factor is a long-short portfolio — e.g., HML is long cheap stocks, short expensive ones."
• Give the use. "Performance attribution: separating true alpha from factor exposures a manager rode."

Common Mistakes in Fama French Interview Answers

• Listing factors without meaning. Each acronym needs its long-short construction — letters alone are just vocabulary.
• Forgetting momentum. The famous sixth factor (Carhart's UMD) is absent from Fama-French — mentioning it shows awareness.
• Treating factors as truths. They are empirical regularities with live debates about risk versus mispricing — hold the nuance.

Fama-French is the grammar of modern equity attribution — factors, construction, and the attribution use is full marks.

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FAQ

Q: What are the Fama-French three factors? A: Market excess return, SMB (small-minus-big size factor), and HML (high-minus-low value factor).

Q: What did the five-factor model add? A: RMW (robust-minus-weak profitability) and CMA (conservative-minus-aggressive investment) factors.

Q: What is the momentum factor called? A: UMD (up-minus-down) — added by Carhart; notably absent from the original Fama-French models despite strong evidence.

Q: How are Fama-French factors used in practice? A: For performance attribution and risk modeling — decomposing returns into factor exposures versus idiosyncratic alpha.

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