Lovleen Gupta

Type of the article: Research Article

Abstract
This study evaluates asset pricing models in India, highlighting the superiority of the Fama-French Three-Factor Model over CAPM while questioning the added value of the Fama-French Five-Factor Model. The findings offer insights for investors and policymakers in portfolio management and asset allocation. The study evaluates and compares the performance of asset pricing models – Single-Factor Model of Sharpe and Linter, Three-Factor Model of Fama and French, and Five-Factor Model of Fama and French– on the Indian stock market. It employs the Fama-French methodology to analyze asset pricing. This paper uses four characteristics of a firm to test the market capitalization model for the size effect, the book-to-price ratio for the value effect, the net income to book equity ratio as a variable of profitability effect, and annual growth of total assets for the investment effect. Spanning nine years from July 1, 2012 to June 30, 2021, this study examines 64 companies from the NSE 100 index to analyze stock return dynamics. This study provides a comprehensive comparison of the three models using 18 (6 x 3) portfolios constructed based on size, value, profitability, and investment. The study found that the Fama-French Three-Factor Model, with an R² of 95.6%, outperformed the Capital Asset Pricing Model, which had an R² of 89.9%. Although the Fama-French Five-Factor Model achieved the highest R² of 95.8%, its improvement over FF3FM was minimal. This indicates that the inclusion of profitability and investment factors does not significantly enhance the model’s ability to explain stock returns.