(Harvest) The Capital Asset Pricing Model (CAPM) was proposed in 1964, and was the first market model that attempted to describe the process that drives equity returns. Under CAPM, the expected return of a stock is determined by a single factor, the market return.
By the 1980s, empirical evidence was accumulating that investment strategies biased towards small-cap and value securities might generate higher returns over the long term than predicted by CAPM, both in the US and abroad. In 1992, Fama and French proposed the Three-Factor Model, which explained historical US market returns more accurately than CAPM, by using three factors –market, size, and value. This model demonstrated that investors would be well compensated for adding factor tilts to small and value stocks to the single-factor market strategy.
