Chartered Financial Analyst (CFA) Practice Exam Level 2 - 2025 Free CFA Level 2 Practice Questions and Study Guide

The Carhart Model, which expands upon the Fama-French three-factor model, incorporates specific factors that explain stock returns, particularly in the context of mutual fund performance. The model includes four factors: the market excess return, the size effect (market capitalization), the value effect (book-to-market ratio), and a momentum factor.

In this context, liquidity is not one of the factors included in the Carhart Model. While liquidity is an important component in understanding various financial models and market dynamics, it does not explicitly factor into the Carhart framework used for assessing performance based on the aforementioned components. The omission of liquidity as a factor helps clarify the specific focus of the Carhart Model on identifying momentum, size, value, and market influences as drivers of excess return, rather than liquidity conditions within the market.