What are RMW and CMA in the Fama-French five-factor model?

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AcadiFi · Accepted Answer

Fama and French (2015) extended their three-factor to include RMW (Robust Minus Weak) for profitability and CMA (Conservative Minus Aggressive) for investment. The premise: a dividend discount model implies expected return depends not only on market, size, and book-to-market, but also on expected profitability and expected investment. Holding book-to-market constant, firms with higher profitability and lower investment should earn higher expected returns.

RMW = return on most-profitable-30% minus least-profitable-30%, where profitability = operating profit divided by book equity. CMA = return on conservative-30% (lowest asset growth) minus aggressive-30% (highest asset growth).

Example: Hawthorn Equity Fund shows loadings β_RMW = 0.28 and β_CMA = 0.19 over 8 years, with historical premia of about 0.32% and 0.27% per month respectively. Combined contribution to expected return = (0.28 × 0.32% + 0.19 × 0.27%) × 12 ≈ 1.69% annually.

Importantly, HML becomes redundant after adding RMW and CMA in many specifications — its slope goes to zero, suggesting value effects were partly proxying for profitability and investment.

The five-factor model has become the benchmark for academic asset pricing tests. Practitioners augment with momentum to get the FF5+UMD model.

What are RMW and CMA in the Fama-French five-factor model?

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