Explanation:
The correct answer is B because the Carhart four-factor model extends the Fama-French three-factor model by incorporating momentum as an additional factor. This model is widely recognized for its practical application in explaining asset returns.
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Momentum, characterized by historical stock performance, is most likely incorporated in which of the following models?
A
Fundamental factor models, which evaluate relationships between security returns and underlying company fundamentals such as earnings, cash flow, and investments.
B
The Carhart four-factor model, an extension of the Fama-French model that includes momentum as an additional factor.
C
The Fama-French three-factor model, which originally included factors like size and book-to-market value but did not account for momentum.