... the addition of independent variables to a regression often improves the explanatory power of a model. For these reasons, multifactor models relax the assumption and constraint of a single risk factor and look for other factors that affect expected return to assets. The Fama-French Three-Factor Model expands the capabilities of the CAPM model by adding two company specific risk factors - SMB and HML. The three factors in concert explain most of the returns due to risk exposure. Then, expected return can be explained by the following multiple-variable regression model : (http://www.moneychimp.com/articles/risk/multifactor.htm) SMB, which stands for Small Minus Big, is designed to measure the additional return investors have historically received by investing in stocks of companies with relatively small market capitalization. This additional return is often referred to as the "size premium." In practice, the SMB monthly factor is computed as the average return for the smallest 30% of stocks minus the ...

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