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The Value Premium and the CAPM

Authors

  • EUGENE F. FAMA,

  • KENNETH R. FRENCH

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    • Graduate School of Business, University of Chicago (Fama), and Amos Tuck School of Business, Dartmouth College (French). We acknowledge helpful comments from Jonathan Lewellen, Kendall Liao, Eduardo Repetto, seminar participants at Emory University, and a referee.

ABSTRACT

We examine (1) how value premiums vary with firm size, (2) whether the CAPM explains value premiums, and (3) whether, in general, average returns compensate β in the way predicted by the CAPM. Loughran's (1997) evidence for a weak value premium among large firms is special to 1963 to 1995, U.S. stocks, and the book-to-market value-growth indicator. Ang and Chen's (2005) evidence that the CAPM can explain U.S. value premiums is special to 1926 to 1963. The CAPM's more general problem is that variation in β unrelated to size and the value-growth characteristic goes unrewarded throughout 1926 to 2004.

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