Question: The Fama - French five factor model extends their three - factor model by adding two factors. One of them is profitability factor, motivated by

The Fama-French five factor model extends their three-factor model by adding two factors.
One of them is profitability factor, motivated by empirical evidence that firms with higher
profitability generate higher returns than those with lower profitability.
i. What is Fama-French three-factor model? Explain.
ii. If market is efficient, this difference in return must be explained by extra risk investors
are taking from investing in profitable firms. What do you think is the extra risk? Discuss

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