Question: 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 profitable
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 profitable firms generate higher returns than unprofitable firms. 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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