The first risk factor is the traditional CAPM beta. The second factor is the difference in returns between high market-to-book companies and firms with low ratios of market value to book value. The third variable measures the difference in returns of small firms (S) minus big firms (B). The data series used were compiled by Fama and French. The Fama-French three factor model has been successfully applied not only in the United States but in Europe as well. The ability of the model to explain the cross-section of European stock returns has been documented by.
