Mullennium Finance LLC is Considering the Addition of a Fourth Factor in Constructing Their Investment Portfolios- the Jury is Still Out

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Eugene Fama of the University of Chicago and Kenneth French of Dartmouth developed the Three Factor Model of Investing in the late 1980s. Now academia is proposing a fourth factor that has a premium return.

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Simplicity is the ultimate sophistication. - Leonardo da Vinci

Fama & French have shown that returns from equities versus fixed income, value stocks versus growth stocks and small stocks versus large stocks, offer a premium for the additional risk taken. It is called The Three Factor Model.

Now there is consideration in academia of a Fourth Factor known as Profitability. Robert Novy-Marx (2013) an assistant professor of finance at the University of Rochester believes he has found that a quality measure, gross profitability (revenues minus cost of goods sold, scaled by assets), can be used as a predictor of stock returns.

Novy-Marx' research is apparently influencing at least two fund management firms, Dimensional Fund Advisors (DFA) and AQR Capital Management, to incorporate his findings into some of their offerings.

Mark Matson, President of Matson Money in Cincinnati, Ohio has said that he is seriously reviewing Novy-Marx' work. Matson Money creates structured portfolios using some of DFAs funds.

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Bill Mullen
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