A Comparative Study of Markowitz, CAPM and Fama-French Models in Portfolio Return Forecasting

Research Article
Open access

A Comparative Study of Markowitz, CAPM and Fama-French Models in Portfolio Return Forecasting

Yixuan Zhang 1*
  • 1 Faculty of Finance, City University of Macau, Macau, China    
  • *corresponding author F22090107101@cityu.edu.mo
AEMPS Vol.188
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-80590-175-4
ISBN (Online): 978-1-80590-176-1

Abstract

This paper aims to offer a deep comparative study of the financial markets by using three important portfolio theories: Markowitz Portfolio Theory, Capital Asset Pricing Model (CAPM), and Fama-French Multifactor Model. By analyzing the underlying assumptions, model construction, risk-capturing ability, and their efficacy in predicting portfolio returns, this paper endeavors to illuminate the application of these theories in modern portfolio management and their strengths, weaknesses, and differences from each other. It is found that while the Markowitz model emphasizes the core of diversification in risk management, the Fama-French model offers a more thorough framework for risk assessment by adding various risk variables, whereas the CAPM provides a more succinct approach through the concept of systematic risk. Each model has specific application scenarios and limitations, and its effectiveness relies on market conditions and investors' needs. The research in this paper provides theoretical guidance for scholars and investors specializing in finance and a practical reference for actual investment management.

Keywords:

Markowitz portfolio theory, capital asset pricing model (CAPM), Fama-French multifactor model

Zhang,Y. (2025). A Comparative Study of Markowitz, CAPM and Fama-French Models in Portfolio Return Forecasting. Advances in Economics, Management and Political Sciences,188,15-20.
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References

[1]. Markowitz, H. M. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91.

[2]. Sharpe, W. F. (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.

[3]. Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56.

[4]. Markowitz, H. M. (1959). Portfolio selection: efficient diversification of investments. John Wiley & Sons.

[5]. Markowitz, H. M. (1991). Foundations of portfolio theory. The Journal of Finance, 46(2), 469-477.

[6]. Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52(1), 57-82.

[7]. Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. journal of financial economics, 116(1), 1-22.

[8]. Fama, E. F., & French, K. R. (1996). Multifactor explanations of asset pricing anomalies. the Journal of Finance, 51(1), 55-84.

[9]. Fama, E. F., & French, K. R. (1998). Value versus growth: The international evidence. The Journal of Finance, 53(6), 1975-1999.

[10]. Jensen, M. C. (1968). The performance of mutual funds in the period 1945-1964. The Journal of Finance, 23(2), 389-416.

[11]. Roll, R. (1977). A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory. Journal of Financial Economics, 4(2), 129-176.

[12]. Black, F., Jensen, M. C., & Scholes, M. (1972). The capital asset pricing model: some empirical tests. Studies in the Theory of Capital Markets, 81(3), 79-121.

[13]. Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: Empirical tests. Journal of Political Economy, 81(3), 607-636.

[14]. Merton, R. C. (1973). An intertemporal capital asset pricing model. Econometrica, 41(5), 867-887.

Cite this article

Zhang,Y. (2025). A Comparative Study of Markowitz, CAPM and Fama-French Models in Portfolio Return Forecasting. Advances in Economics, Management and Political Sciences,188,15-20.

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The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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About volume

Volume title: Proceedings of the 3rd International Conference on Management Research and Economic Development

ISBN：978-1-80590-175-4(Print) / 978-1-80590-176-1(Online)
Editor：Lukáš Vartiak
Conference website: https://2025.icmred.org/
Conference date: 30 May 2025
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.188
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. Markowitz, H. M. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91.

[2]. Sharpe, W. F. (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.

[3]. Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56.

[4]. Markowitz, H. M. (1959). Portfolio selection: efficient diversification of investments. John Wiley & Sons.

[5]. Markowitz, H. M. (1991). Foundations of portfolio theory. The Journal of Finance, 46(2), 469-477.

[6]. Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52(1), 57-82.

[7]. Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. journal of financial economics, 116(1), 1-22.

[8]. Fama, E. F., & French, K. R. (1996). Multifactor explanations of asset pricing anomalies. the Journal of Finance, 51(1), 55-84.

[9]. Fama, E. F., & French, K. R. (1998). Value versus growth: The international evidence. The Journal of Finance, 53(6), 1975-1999.

[10]. Jensen, M. C. (1968). The performance of mutual funds in the period 1945-1964. The Journal of Finance, 23(2), 389-416.

[11]. Roll, R. (1977). A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory. Journal of Financial Economics, 4(2), 129-176.

[12]. Black, F., Jensen, M. C., & Scholes, M. (1972). The capital asset pricing model: some empirical tests. Studies in the Theory of Capital Markets, 81(3), 79-121.

[13]. Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: Empirical tests. Journal of Political Economy, 81(3), 607-636.

[14]. Merton, R. C. (1973). An intertemporal capital asset pricing model. Econometrica, 41(5), 867-887.

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