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. Excess Returns

    Investment returns from a security or portfolio that exceed a ...
  3. Small-Value Stock

    A description of stock where the underlying company has a small ...
  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 ...
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