Final answer:
The Fama French Seven Factor Model is an extension of the original Three Factor Model and includes seven factors that explain stock returns. Research has shown that these factors can significantly explain variations in stock returns.
Step-by-step explanation:
Fama French Seven Factor Model: Explanation and Findings
The Fama French Seven Factor Model is an extension of the original Fama French Three Factor Model, which was developed to explain stock returns. The model includes additional factors that capture various sources of risk and return in the market. The seven factors are as follows:
Market Return: Represents the overall performance of the market.
Size: Measures the effect of a company's market capitalization on its returns.
Value: Captures the effect of a company's price-to-book ratio on its returns.
Profitability: Reflects the impact of a company's profitability on its returns.
Investment: Takes into account a company's investment levels and their impact on returns.
Momentum: Considers the effect of a company's recent stock price performance on its returns.
Term Spread: Measures the difference between long-term and short-term interest rates and its impact on returns.
Research on the Fama French Seven Factor Model has found that these additional factors can explain a significant portion of the variations in stock returns. By including these factors, the model provides a more comprehensive understanding of the factors that drive stock performance.