This model expands on the capital asset pricing model (CAPM) by adding size risk and value risk factors to the market risk factor in CAPM.
Where,
r = Expected rate of return
rf = Risk-free rate
ß = Factor’s coefficient (sensitivity)
(rm – rf) = Market risk premium
SMB (Small Minus Big) = Historic excess returns of small-cap companies over large-cap companies
HML (High Minus Low) = Historic excess returns of value stocks (high book-to-price ratio) over growth stocks (low book-to-price ratio)
↋ = Risk