CFA Fama French Model Memorization Trick

Fama-French Model for CFA

Below is a second excerpt from the Level 2 Analyst Tricks CFA Cram guide. The first sample trick is dealing with nonparallel yield curve twists. The Analyst Trick guide aims to offer quick, easy to recall memory tricks for CFA concepts that are otherwise easy to forget. Nothing is worse than getting to exam day, understanding the concept being tested, but completely blanking while trying to recall the precise term, definition, or formula. Analyst Tricks aims to alleviate this tendency on the CFA!

The sample below aims to help you remember exactly what Fama French is dealing with. It’s a very simple concept everyone should know, but if it’s not a term you work with day-in-day-out, it’s easy to forget which factor Fama French adds on.

Equity
Analysis
Fama French Sized Fries

CFA Concept

Fama French CFA StudyThe Fama-French is a simple multi-factor model that tries to account for the higher stock market 
 returns for small cap stocks. It does so by adding a market cap size factor on top of CAPM.

  • Fama-French solves for a stock’s required return
  • The 3 parts of Fama-French:
  • Market Premium, Market Cap spread, and Book Value

The Memory Trick

Most European and French sized food portions are a lot smaller than American portions

  • Fama-French Model for CFAThis is even true for FrenchFries!Thus, Fama French addresses Small sized caps.
  • Small Cap size is a premium.A luxury.Like many French goods are premium quality.
  • French is Book Value. The French archetype is ‘sophisticated’.Sophisticated French men like to read books and think and other stuff 😉
  • Return = Risk Free Rate
    • + Market Premium: = β(Return on val weighted index – RFR)
    • + Cap size: = β(Avg Return small caps – Avg Return large caps)
    • + Book Value: = β(Avg Return high book value – Avg Return low book value)

The Actual CFA Guide Screenshot

CFA Fama French Study Guide

Screenshot of Fama French Memory Trick

I made a few more free CFA samples available in PDF format. Check out my  Free CFA Memory Tricks page to get a couple additional memorization strategies for the CFA exam that aren’t on the blog.