A hands-on options curriculum covering real trading concepts. Read the lessons, work through examples, and test your knowledge.
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Lesson 2: 17.2: Multi-Factor Risk Models (Fama-French, Carhart, & Barra Factors)
Explore multi-factor risk decomposition, Fama-French 3-factor and 5-factor models, Carhart momentum, and Barra risk models.
1. From Single-Factor to Multi-Factor Risk Models
Single-factor CAPM fails to explain cross-sectional stock returns. Multi-factor models decompose returns into systematic factor exposures.
The Fama-French 3-Factor model adds Size (SMB: Small Minus Big) and Value (HML: High Minus Low) to Market Beta.
★ Fama-French 5-Factor Model: Adds Profitability (RMW: Robust Minus Weak) and Investment (CMA: Conservative Minus Aggressive) factors.
2. Carhart Momentum & Barra Institutional Factor Risk
Carhart extended the model by adding Momentum (WML: Winners Minus Losers).
Barra commercial risk models decompose risk across macro factors, style factors (Value, Growth, Volatility, Momentum, Size), and industry sectors to monitor portfolio risk attribution.
Click to enlargeIV Crush Scenario Visualizer
Implied Volatility (IV) Crush is the primary account-killer for option buyers after earnings announcements. Play with the controls below to see how option premium collapses depending on Vega.
Scenario Modeling
KNOWLEDGE RECONNAISSANCE
In the Fama-French 3-Factor Model, what does the 'HML' factor represent?
More lessons in this module
- 17.0: Modern Portfolio Theory (MPT) & Efficient Frontier Optimization
- 17.1: Capital Asset Pricing Model (CAPM), Beta, & Security Market Line
- 17.3: Black-Litterman Model & Bayesian Asset Allocation
- 17.4: Risk Parity & Equal Risk Contribution (ERC) Portfolios
- 17.5: Dynamic Rebalancing, Tax-Loss Harvesting, & Friction Management
- 17.6: Alternative Beta, Risk Premia, & Smart Beta Indexing
- 17.7: Tail Risk Hedging & Downside Protection Frameworks
- 17.8: Institutional Asset-Liability Management (ALM) & Endowment Models
Signal Desk is where you practice this on real stocks: real option chains (about 15 minutes delayed), the Trade Check and a paper-trading account that risks no real money. Join to add it, your progress tracking and PDF downloads.