Comparison of the CAPM and Multi-Factor Fama–French Models for the Valuation of Assets in the Industries with the Highest Number of Transactions in the US Market

Karime Chahuán-Jiménez, Luis Muñoz-Rojas, Sebastián Muñoz-Pizarro and Erik Schulze-González ()
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Karime Chahuán-Jiménez: Escuela de Auditoría, Centro de Investigación en Negocios y Gestión Empresarial, Universidad de Valparaíso, Valparaíso 2361891, Chile
Luis Muñoz-Rojas: Escuela de Ingeniería Industrial, Facultad de Ingeniería, Universidad de Valparaíso, Valparaíso 2340000, Chile
Sebastián Muñoz-Pizarro: Escuela de Ingeniería Industrial, Facultad de Ingeniería, Universidad de Valparaíso, Valparaíso 2340000, Chile
Erik Schulze-González: Escuela de Ingeniería Industrial, Facultad de Ingeniería, Universidad de Valparaíso, Valparaíso 2340000, Chile

IJFS, 2025, vol. 13, issue 3, 1-18

Abstract: This study comparatively evaluated the Capital Asset Pricing Model (CAPM), the Fama and French three-factor model (FF3), and the Fama and French five-factor model (FF5) in key US market sectors (finance, energy, and utilities). The goals were to optimize financial decisions and reduce valuation errors. The historical daily returns of ten-stock portfolios, selected from sectors with the highest trading volume in the S&P 500 Index between 2020 and 2024, were analyzed. Companies with the lowest beta were prioritized. Models were compared based on the metrics of the root mean square error (RMSE) and mean absolute error (MAE). The results demonstrate the superiority of the multifactor models (FF3 and FF5) over the CAPM in explaining returns in the analyzed sectors. Specifically, the FF3 model was the most accurate in the financial sector; the FF5 model was the most accurate in the energy and utilities sectors; and the FF4 model, with the SMB factor eliminated in the adjustment of the FF5 model, was the least error-prone. The CAPM’s consistent inferiority highlights the need to consider factors beyond market risk. In conclusion, selecting the most appropriate asset valuation model for the US market depends on each sector’s inherent characteristics, favoring multifactor models.

Keywords: multifactor asset pricing models; predictive accuracy; Fama–French factors; RMSE; MAE; CAPM (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
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