14 Pages Posted: 19 Dec 2003
The first-year MBA finance course regularly includes a discussion of the CAPM. This teaching note extends the typical textbook discussion of CAPM in two ways. First, it provides a step-by-step approach explaining empirically how one can calculate beta and alpha using simple regression. Second, it extends the risk-return asset pricing relationship to the richer three-factor Fama-French model. By examining and controlling for the multiple betas of this model, students can come to understand mutual fund investment styles and multi-factor alphas.
Suggested Citation: Suggested Citation
Womack, Kent L. and Zhang, Ying, Understanding Risk and Return, the CAPM, and the Fama-French Three-Factor Model. Tuck Case No. 03-111. Available at SSRN: https://ssrn.com/abstract=481881