Implications of Fama-French Models and Critical Evaluation of Cost of Equity Approach in Explanation of Variations in Expected Stock Returns

Abstract

CAPM theory that solves relationship between asset return and asset risk for potential investment project by CML and SML, is illustrated in the first section as an introduction of further analysis of corporate valuation techniques. Fama and French three factor model is perceived as a revision of CAPM, although it stills has severe weaknesses. CAPM theory solves relationship between asset return and asset risk for potential investment project by CML and SML.