In their $1992$ paper, Eugene F$.$ Fama and Kenneth R$.$ French explain what affects the returns on stocks and bonds. They argue that there are three main factors, not just one, that help us understand why some investments do better than others. Here$$s a breakdown of their ideas in simple terms: $1.$ Market Risk $($Market Premium$)$: This is the risk you take by investing in the overall stock market. Generally, stocks do better than safe investments $($like bonds$),$ but they come with more risk. Fama and French say this is one factor that influences returns. $2.$ Size of Companies $($SMB $-$ Small Minus Big$)$: Smaller companies tend to have higher returns than bigger ones, but they also come with more risk. So$,$ the size of a company is another important factor in understanding why some stocks perform better than others. $3.$ Value of Companies $($HML $-$ High Minus Low$)$: Companies that are "cheap" based on their financial value $($called value stocks$)$ often do better than those that are "expensive" $($growth stocks$).$ This difference in value is the third factor. Together, these three factors$$market risk, company size, and company value$$help explain why different stocks and bonds have different returns. This three$-$factor model is more complete than older models and is widely used to predict investment performance today.NeedNeed SumSummary