High Minus Low - HML


DEFINITION of 'High Minus Low - HML'

One of three factors in the Fama and French asset pricing model. HML accounts for the spread in returns between value and growth stocks. HML argues that companies with high book-to-market ratios (value stocks) outperform those with low ones (growth stocks).

Also referred to as the "value premium".

BREAKING DOWN 'High Minus Low - HML'

Fama and French's Three Factor model is often used to evaluate a portfolio manager's returns. A typical measure of good management is large excess returns.

The model's three factors, including HML, attempt to explain excess returns in a manager's portfolio. Specifically, HML shows whether a manager was relying on the value premium (investing in stocks with high book-to-market ratios) to earn an abnormal return. If the manager was buying only value stocks, the model regression would show a positive relation to the HML factor, which explains that the portfolios returns are accredited only to the value premium. Because the model can explain more of the portfolio's return, the original excess return of the manager decreases.

  1. Fama And French Three Factor Model

    A factor model that expands on the capital asset pricing model ...
  2. Small-Value Stock

    A description of stock where the underlying company has a small ...
  3. Multi-Factor Model

    A financial model that employs multiple factors in its computations ...
  4. Value Stock

    A stock that tends to trade at a lower price relative to it's ...
  5. Book-To-Market Ratio

    A ratio used to find the value of a company by comparing the ...
  6. Growth Stock

    Shares in a company whose earnings are expected to grow at an ...
Related Articles
  1. Bonds & Fixed Income

    Achieving Better Returns In Your Portfolio

    We look at three risk factors that best explain the bulk of equity performance.
  2. Forex Education

    Using The Price-To-Book Ratio To Evaluate Companies

    The P/B ratio can be an easy way to determine a company's value, but it isn't magic!
  3. Options & Futures

    Financial Concepts

    Diversification? Optimal portfolio theory? Read this tutorial and these and other financial concepts will be made clear.
  4. Technical Indicators

    Explaining Autocorrelation

    Autocorrelation is the measure of an internal correlation with a given time series.
  5. Term

    Public Goods & Free Riders

    A public good is an item whose consumption is determined by society, not individual consumers.
  6. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  7. Stock Analysis

    Investing in Lumber Liquidators? Read This First

    Find out what investors should know before buying Lumber Liquidators shares. Learn about Lumber Liquidators' financial performance and operational outlook.
  8. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  9. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  10. Economics

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  1. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  2. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  5. How can a company execute a tax-free spin-off?

    The two commonly used methods for doing a tax-free spinoff are either to distribute shares of the spinoff company to existing ... Read Full Answer >>
  6. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!