If assets are priced rationally, variables that are related… - Eugene Fama

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If assets are priced rationally, variables that are related to average returns, such as size and book-to-market equity, must proxy for sensitivity to common (shared and thus undiversifiable) risk factors in returns. The time-series regressions give direct evidence on this issue. In particular, the slopes and R2 values show whether mimicking portfolios for risk factors related to size and [book-to-market] capture shared variation in stock and bond returns not explained by other factors.

Eugene Fama

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About Eugene Fama

Eugene Francis "Gene" Fama (born February 14, 1939) is an American economist and Nobel laureate in Economics with Lars Peter Hansen and Robert J. Shiller, known for his work on and , both theoretical and empirical.

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Also Known As: Gene

Alternative Names: Eugene Francis Fama • Eugene Francis "Gene" Fama • Gene Fama • Fama

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Burton Malkiel Warren Buffett Benjamin Graham Peter Lynch Robert Haugen

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Although size and book to market equity seem like ad hoc variables for explaining average stock returns, we have reason to expect that they proxy for common risk factors in returns.

The question is when is good? The answer is never.

If assets are priced rationally, variables that are related to average returns, such as size and book-to-market equity, must proxy for sensitivity to… - Eugene Fama

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