In 1993, Eugene Fama and Kenneth French proposed a new model to improve the capital asset pricing model (CAPM), which was the three-factor model factors compared to the CAPM included. two additional factors, size and value. Although the three-factor model has enjoyed great popularity, it has not been able to explain certain anomalies or the cross-sectional variation in expected returns, particularly related to profitability and investment. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get an original essay This article is about the introduction of 2 new factors by the Fama and the French into the old model. The first factor concerns profitability and the other concerns investment. The impetus was Novy-Marx et al (2013) and similar papers which had spotted that it could be further improved. The first part of this work focuses on the methodology used by Fama and French and how they developed the five-factor model. . In the second part of my work, I will contrast and discuss whether this new model is useful to practitioners and the application of this model in comparison with its older brother. Metrological data from numerous research shows that stock returns are linked to the book-to-market equity ratio as well as profitability and investment. As a starting point, the authors use the dividend discount model to explain why these variables are related to average returns. With a little manipulation based on the dividend discount model, the authors are able to extract two additional factors, profitability and investment, to add to their three-factor model. They define profitability as operating profit less interest expense divided by book equity, and they measure investment as the change in total assets divided by total assets. The authors test the performance of the five-factor model in 2 fundamental steps. In their work FF (2014), they compare whether the new model performs better than the old one when used to explain average returns related to significant anomalies not targeted by the model. Farma and French also attempted to explain whether the model's failures are related to common characteristics of problem portfolios. They perform empirical tests to verify whether the five-factor model and relative models can explain the average returns of portfolios constructed to produce significant differences in size, B/M, profitability, and investment. Their starting point was to look at size, B/M (Book to Market), profitability and investment models in terms of average returns. In order to examine which construct factors are important in testing asset pricing models, Fama and French used 3 sets of factors. The first set is the classic three-factor model of FF (1993) and defines the factors of profitability and investment as a value. factor in this model. The second is the four-factor model and the last is the five-factor model. The authors' study covers 606 months of data, from July 1963 to December 2013, which includes an additional 21 years of new data since the publication of their archetypal three-factor model in 1993. Using market capitalization breakpoints of the NYSE, at the end of June of each month, stocks are divided into groups of different sizes. Other factors (i.e. value, operating profit, etc.) are broken down into their respective categories and ranked from low to high. The authors calculate the returns.