What do the Fama–French factors add to C-CAPM?

• We extend the standard C-CAPM by including SMB and HML factors.
• Inclusion of HML improves the fit of low book-to-market portfolios, SMB and HML.
• Consumption premium varies across size.
• Possible explanation for HML is its association with investment prospects of firms.

This study extends standard C-CAPM by including two additional factors related to firm size (SMB) and book-to-market value ratio (HML) — the Fama–French factors. C-CAPM is least able to price firms with low book-to-market ratios. The explanation of these returns, as well as the returns on the SMB and HML portfolios, is significantly improved by the inclusion of the HML factor. The component of the risk premia explained by consumption varies across size. We suggest that a possible explanation for the role of HML is its association with the investment growth prospects of firms.