Carhart four-factor model

Definition

Carhart four-factor model in plain English

This is a tool that tries to explain WHY a stock or fund earned the return it did, by breaking it into a few driving forces. An earlier famous version (Fama-French) said returns depend on the overall market, on company size, and on cheapness. Carhart adds one more force called "momentum" — the tendency for stocks that have been rising lately to keep rising a while. So it's like a recipe with four ingredients instead of three, giving a fuller picture of what really moved the money.

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