Topic 10 Exercise 1 Asset Pricing Models Multifactor Models Eugene Fama from the University of Chicago and Kenneth R. French from the Yale School of Management examined the validity of the Capital Asset Pricing Model (CAPM) in a study that was published in 1992. The CAPM is the most recognized model to explain stock price returns and forms the foundation of Modern Portfolio Theory. Their extensive study showed that, at minimum, the CAPM was not a complete explanation of the factors explaining asset pricing. Their findings also have some implications for investment performance of growth versus value stocks. A summary of their key findings can be found in Rethinking Stock Returns. After reading this summary, answer the following questions: 1. How did the researchers define value versus growth stocks? What relevance did their findings have on investing? Fama and French define value stocks as stocks that have a high book value of equity relative to the market value of equity. Growth stocks would have a low book value
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