High Minus Low - HML

One of three factors in the Fama and French asset pricing model. HML accounts for the spread in returns between value and growth stocks. HML argues that companies with high book-to-market ratios (value stocks) outperform those with low ones (growth stocks).

Also referred to as the "value premium".

Fama and French's Three Factor model is often used to evaluate a portfolio manager's returns. A typical measure of good management is large excess returns.

The model's three factors, including HML, attempt to explain excess returns in a manager's portfolio. Specifically, HML shows whether a manager was relying on the value premium (investing in stocks with high book-to-market ratios) to earn an abnormal return. If the manager was buying only value stocks, the model regression would show a positive relation to the HML factor, which explains that the portfolios returns are accredited only to the value premium. Because the model can explain more of the portfolio's return, the original excess return of the manager decreases.