The new fama-french model replaces the existing five-factor model. The new five-factor fama-french model includes profitability and investment factors.
Profitability factor: Robust minus weak operating profit (RWA )= (SR + BR) / 2 – (SW + BW) / 2 = [(SR – SW) + ( BR – BW)] / 2
Investment factor: Conservative minus aggressive Investment (CMA) = (SC + BC) / 2 – (SA + BA) / 2 = [(SC – SA) + ( BC -BA)] / 2
Investment factor: Conservative minus aggressive Investment (CMA) = (SC + BC) / 2 – (SA + BA) / 2 = [(SC – SA) + ( BC -BA)] / 2
S = small ; B = big; R = Robust; W= Weak; C= Conservative; A = Aggressive
The new model is:
$R_{t}-RF_{t} = alpha + beta_{1}[RM_{t}-RF_{t}] + beta_{2}SMB_{t} + beta_{3}HML_{t} + beta_{4}RMW_{t} + beta_{5}CMA_{t} + epsilon_{t}$
$RM_{t}-RF_{t}$ = excess market return
$SMB_{t}$ = the Size factor
$HML_{t}$ = the value factor
$RMW_{t}$ = the profitability factor
$CMA_{t}$ = the investment factor
$RF_{t}$ = risk free rate
The new model is:
$R_{t}-RF_{t} = alpha + beta_{1}[RM_{t}-RF_{t}] + beta_{2}SMB_{t} + beta_{3}HML_{t} + beta_{4}RMW_{t} + beta_{5}CMA_{t} + epsilon_{t}$
$RM_{t}-RF_{t}$ = excess market return
$SMB_{t}$ = the Size factor
$HML_{t}$ = the value factor
$RMW_{t}$ = the profitability factor
$CMA_{t}$ = the investment factor
$RF_{t}$ = risk free rate