ABSTRACT
In this chapter, the authors provide a replication of the famous Fama and French factor portfolios. The Fama and French three-factor model is a cornerstone of asset pricing. The value factor is High-Minus-Low (HML) and is long in high book-to-market firms and short in low book-to-market counterparts. Equipped with the return data and the assigned portfolios, the developers can now compute the value-weighted average return for each of the six portfolios. Then, they form the Fama and French factors. Fama and French also have a different protocol for computing the book-to-market ratio. The replication of the HML factor is also a success, although at a slightly lower level with coefficient and R-squared around 95%.
