Table of Contents

High Minus Low (HML): Understanding the Value Premium in Finance

By

Updated September 17, 2025

Reviewed by

What Is High Minus Low (HML)?

High Minus Low (HML), also called the value premium, is one of the three factors in the Fama-French three-factor model, developed by economists Eugene Fama and Kenneth French to explain stock returns.

HML measures the difference in performance between value stocks, which have high book-to-market ratios, and growth stocks, which have lower ones.

By capturing this spread, HML helps investors see how value versus growth influences portfolio performance. This helps investors gain better insight into market behavior and can help them make more informed decisions.

Key Takeaways

The High Minus Low (HML) factor represents the return spread between value stocks with high book-to-market ratios and growth stocks with low ratios, highlighting the historical performance advantage of value stocks.
Fama and French's three-factor model, which includes HML, is used to better explain portfolio returns by accounting for the value effect, alongside size and market factors.
The updated five-factor model by Fama and French expands upon the original by incorporating profitability and investment factors to provide a more comprehensive view of expected stock returns.
Positive HML beta implies a portfolio is aligned with value stocks, while a negative beta suggests a growth stock alignment, helping investors understand portfolio dynamics.
The Fama-French model is often favored over the Capital Asset Pricing Model (CAPM) for its broader perspective on returns, despite variations based on portfolio construction.

How High Minus Low (HML) Works in Finance

To understand HML, it is important to first have a basic understanding of the Fama-French three-factor model. Established in 1992 by Eugene Fama and Kenneth French, the model uses three factors, including HML, to explain excess returns in a manager's portfolio.

The model suggests that portfolio returns partly depend on factors beyond managers' control. Historically, value stocks have outperformed growth stocks, and smaller companies have outperformed larger ones.

Important

Small and value stocks tend to outperform larger or growth-focused ones, explaining much of a portfolio's performance.

The first of these factors (the outperformance of value stocks) is referred to by the term HML, whereas the second factor (the outperformance of smaller companies) is referred to by the term Small Minus Big (SMB). By assessing how much performance is due to these factors, the model helps estimate the manager's skill.

The HML factor reveals if a manager relies on the value premium by investing in high book-to-market stocks for abnormal returns.

If the manager is buying only value stocks, the model regression shows a positive relation to the HML factor, which explains that the portfolio’s returns are attributable to the value premium. As the model explains more of the portfolio's return, the manager's original excess return decreases.

Expanding to the Fama-French Five-Factor Model

In 2014, Fama and French updated their model to include five factors. Along with the original three, the new model adds the concept that companies reporting higher future earnings have higher returns in the stock market, a factor referred to as profitability. The fifth factor, referred to as investment, relates to the company’s internal investment and returns, suggesting that companies that invest aggressively in growth projects are likely to underperform in the future.

Why Is Fama French Better Than CAPM?

The Fama-French three-factor model is an expansion of the Capital Asset Pricing Model (CAPM). The economists Eugene Fama and Kenneth French developed the Fama and French Three-Factor Model in order to address the limitations posed by CAPM. Empirical results from a study published in 2012 point out that the Fama and French Three-Factor Model is better than CAPM at explaining expected returns. This study tests the expected returns, according to the CAPM and Fama and French Three-Factor Model, of a portfolio selection from the New York Stock Exchange (NYSE). However, the study revealed that the outcomes varied depending on how the portfolios were constructed.

What Does the HML Beta Mean?

High Minus Low (HML) is a value premium; it represents the spread in returns between companies with a high book-to-market value ratio and companies with a low book-to-market value ratio. Once the HML factor has been determined, its beta coefficient can be found by linear regression. The HML beta coefficient can also take positive or negative values. A positive beta means that a portfolio has a positive relationship with the value premium, or the portfolio behaves like one with exposure to value stocks. If the beta is negative, your portfolio behaves more like a growth stock portfolio.

The Bottom Line

HML plays a central role in the Fama-French three-factor model, helping investors analyze stock returns by comparing value stocks with growth stocks.

The model shows that companies with higher book-to-market ratios, or value stocks, often outperform those with lower ratios, known as growth stocks. Alongside Small Minus Big (SMB), HML is also used to assess portfolio managers by linking excess returns to market factors rather than individual skill.

The model has since been expanded into a five-factor version, adding profitability and investment as new dimensions. For investors, understanding HML and these broader models offers a valuable perspective, making it easier to interpret performance and make better financial decisions.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

International Journal of Business and Management. "CAPM Vs Fama-French Three-Factor Model: An Evaluation of Effectiveness in Explaining Excess Return in Dhaka Stock Exchange."
Public and Municipal Finance. "The use of CAPM and Fama and French Three Factor Model: portfolios selection."

Take the Next Step to Invest

The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.