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Twenty years after the original Fama-French model, Fama and French (2013) have proposed a new,...

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Accounting

Twenty years after the original Fama-French model, Fama and French (2013) have proposed a new, five-factor model, incorporating two additional factors, RMW and CMA. RMW (robust-minus-weak) is the difference in returns between a portfolio of firms with robust and weak profitability; CMA (conservative-minus-aggressive) is the difference in returns between a portfolio of firms with conservative (i.e. low) and aggressive (i.e. high) investment. Recall the constant growth dividend discount model: P0=E1*(1-b)/(r-g)

The economic intuition behind why HML, CMA and RMW are risk premiums can be derived easily from the above fundamental valuation formula. Explain how.

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