1. Three Factor Model
MHA- Finance
Dr. Raul Ramos
February 2, 2013
• Richard Angoluan
• Lalaine Arcangel
• Hiyasmin Bada
• Rose Cabuco
• Marion Caluag
• Joseph Chavez
• Augusto Cortez
• Karen Magsombol
• Reino Palacpac
• Nimfa Putong
• Gilbert Villanueva

2. Equity
• Residual Claim or interest of the most junior class of
investors in assets after all liabilities are paid
• Liability > assets= Negative Equity
• Share Holder Equity( stockholder equity shareholder
fund or shareholder capital=> represents remaining
interest in assets of the company
• This definition is helpful in under standing the
liquidation process in case of bancraptcy
• All the secured creditors are paid against proceeds
from asset

3. Ownership Equity
- Is the last or residual claim against assets, paid only
after all other creditors are paid.( in such cases were
are creditors could not get enough money to pay
their bills, nothing is left over to reimburse owner’s
equity)
- Risk Capital/Liable Capital

4. Owner’s equity – consist of net asset of an entity
Net Asset - difference between the total assets of the
entity and all its liabilities

5. Assets of An Entity
1. Share capital ( Common Stock)
2. Preffered stock
3. Capital stock
4. Retained earnings
5. Treasury stock
6. Stock option
7. reserve

6. Portfolio
• A grouping of financial assets such as stocks, bonds
and cash equivalents, as well as their mutual,
exchange-traded and closed-fund counterparts.
• are held directly by investors and/or managed by
financial professionals.
• is a financial term denoting a collection of
investment held by an investment company, hedge
fund, financial institution or individual

7. Types of Portfolio
1. Market portfolio - A portfolio consisting of all assets
available to investors, with each asset held in
proportion to its market value relative to the total
market value of all assets.
2. Zero-investment portfolio - A group of investments
which, when combined, create a zero net value.
this can be achieved by simultaneously purchasing
securities and selling equivalent securities. This will
achieve lower risk/gains compared to only
purchasing or selling the same securities.

8. Portfolio Management
• The act or practice of making investment decisions
in order to make the largest possible return. Portfolio
management takes two basic forms: active and
passive

9. Ownership Equity
- Is the last or residual claim against assets, paid only
after all other creditors are paid.( in such cases were
are creditors could not get enough money to pay
their bills, nothing is left over to reimburse owner’s
equity)
- Risk Capital/Liable Capital

10. Owner’s equity – consist of net asset of an entity
Net Asset - difference between the total assets of the
entity and all its liabilities

11. The Three Factor Model
1. Market Factor
2. Size Factor
3. Value Factor

12. THE MARKET FACTOR
The extra risk of Stock vs.
Fixed Income

13. The Three Factor Model
The Market Factor:
>Refers to services of factors of production
>Bought and sold
such as - labor market
capital market
market for raw materials
market for management
market for entrepreneur

14. The Three Factor Model
Firms buy productive resources for making
factor payments at factor prices from:
>derived demands from:
-goods
-services
-output

15. The Three Factor Model
The Market Factor
The extra risk of Stock vs.
Fixed Income

16. The Three Factor Model
The Market Factor:
>Refers to services of factors of production
>Bought and sold
such as - labor market
capital market
market for raw materials
market for management
market for entrepreneur

17. The Three Factor Model
Firms buy productive resources for making
factor payments at factor prices from:
>derived demands from:
-goods
-services
-output

18. SIZE FACTOR

19. SIZE
SECOND RISK FACTOR IN THE THREE FACTOR MODEL
Compares the weighted average market value of the stocks in a
portfolio to the weighted average market value of stocks on the
market.
Small stocks tend to act very difficult than by stocks in almost all
market condition.
In the long run, small stocks have generated higher returns than
large stocks.

20. SIZE
SECOND RISK FACTOR IN THE THREE FACTOR MODEL
• Although the extra result is not free there is more
risks in small stocks. Fama & French call size risks a
different yet important factor in portfolio return.
• Also known as small cap minus big (SMB) in the
formula

21. VALUE FACTOR