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Three Factor ModelMHA- FinanceDr. Raul Ramos
February 2, 2013
• Richard Angoluan• Lalaine Arcangel• Hiyasmin Bada• Rose Cabuco• Marion Caluag• Joseph Chavez• Augusto Cortez• Karen Magsombol• Reino Palacpac• Nimfa Putong• Gilbert Villanueva
Equity
• Residual Claim or interest of the most junior class of investors in assets after all liabilities are paid
• Liability > assets= Negative Equity
• Share Holder Equity( stockholder equity shareholder fund or shareholder capital=> represents remaining interest in assets of the company
• This definition is helpful in under standing the liquidation process in case of bancraptcy
• All the secured creditors are paid against proceeds from asset
Ownership Equity
- Is the last or residual claim against assets, paid only after all other creditors are paid.( in such cases were are creditors could not get enough money to pay their bills, nothing is left over to reimburse owner’s equity)
- Risk Capital/Liable Capital
Owner’s equity – consist of net asset of an entity
Net Asset - difference between the total assets of the entity and all its liabilities
Assets of An Entity
1. Share capital ( Common Stock)
2. Preffered stock
3. Capital stock
4. Retained earnings
5. Treasury stock
6. Stock option
7. reserve
Portfolio
• A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts.
• are held directly by investors and/or managed by financial professionals.
• is a financial term denoting a collection of investment held by an investment company, hedge fund, financial institution or individual
Types of Portfolio
1. Market portfolio - A portfolio consisting of all assets available to investors, with each asset held in proportion to its market value relative to the total market value of all assets.
2. Zero-investment portfolio - A group of investments which, when combined, create a zero net value. this can be achieved by simultaneously purchasing securities and selling equivalent securities. This will achieve lower risk/gains compared to only purchasing or selling the same securities.
Portfolio Management
• The act or practice of making investment decisions in order to make the largest possible return. Portfolio management takes two basic forms: active and passive
Ownership Equity
- Is the last or residual claim against assets, paid only after all other creditors are paid.( in such cases were are creditors could not get enough money to pay their bills, nothing is left over to reimburse owner’s equity)
- Risk Capital/Liable Capital
Owner’s equity – consist of net asset of an entity
Net Asset - difference between the total assets of the entity and all its liabilities
The Three Factor Model
1. Market Factor
2. Size Factor
3. Value Factor
THE MARKET FACTOR
The extra risk of Stock vs. Fixed Income
The Three Factor Model
The Market Factor:
>Refers to services of factors of production
>Bought and sold
such as - labor market
capital market
market for raw materials
market for management
market for entrepreneur
The Three Factor Model
Firms buy productive resources for making factor payments at factor prices from:
>derived demands from:
-goods
-services
-output
The Three Factor Model
The Market FactorThe extra risk of Stock vs.
Fixed Income
The Three Factor Model
The Market Factor:
>Refers to services of factors of production
>Bought and sold
such as - labor market
capital market
market for raw materials
market for management
market for entrepreneur
The Three Factor Model
Firms buy productive resources for making factor payments at factor prices from:
>derived demands from:
-goods
-services
-output
SIZE FACTOR
SIZE SECOND RISK FACTOR IN THE THREE FACTOR MODEL
Compares the weighted average market value of the stocks in a portfolio to the weighted average market value of stocks on the market.
Small stocks tend to act very difficult than by stocks in almost all market condition.
In the long run, small stocks have generated higher returns than large stocks.
SIZE SECOND RISK FACTOR IN THE THREE FACTOR MODEL
• Although the extra result is not free there is more risks in small stocks. Fama & French call size risks a different yet important factor in portfolio return.
• Also known as small cap minus big (SMB) in the formula
VALUE FACTOR
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