A turning point in the debate on risk and return occurred in the early 1990s, when Gene Fama and Ken French wrote one of the most-quoted and influential papers on the topic. In it, they began with a simple premise. If our objective in risk and return models is to come up with expected returns on investments, should we not judge the quality of these models by looking at how well they explained actual returns over very long time periods? They began by looking at the CAPM: in it, all return differences across investments should be explained by differences in betas. Looking at actual stock returns from 1962 to 1990, Fama and French found that betas cannot explain a very large portion of the differences in returns across stocks.
Fama-French and the Proxy Wars
Fama-French and the Proxy Wars
Fama-French and the Proxy Wars
A turning point in the debate on risk and return occurred in the early 1990s, when Gene Fama and Ken French wrote one of the most-quoted and influential papers on the topic. In it, they began with a simple premise. If our objective in risk and return models is to come up with expected returns on investments, should we not judge the quality of these models by looking at how well they explained actual returns over very long time periods? They began by looking at the CAPM: in it, all return differences across investments should be explained by differences in betas. Looking at actual stock returns from 1962 to 1990, Fama and French found that betas cannot explain a very large portion of the differences in returns across stocks.