The correct answer is: B. market to book ratio
The Fama-French three-factor model is a model that describes the cross-section of stock returns in the United States. The model states that the excess return of a stock can be explained by three factors: market risk, size risk, and value risk.
The market risk premium is the additional return that investors demand for holding risky assets over risk-free assets. The size risk premium is the additional return that investors demand for holding small-cap stocks over large-cap stocks. The value risk premium is the additional return that investors demand for holding stocks with low book-to-market ratios over stocks with high book-to-market ratios.
The market-to-book ratio is a measure of a company’s valuation. It is calculated by dividing the market value of a company’s equity by its book value. A high market-to-book ratio indicates that investors believe that the company is worth more than its book value. A low market-to-book ratio indicates that investors believe that the company is worth less than its book value.
The market-to-book ratio is a useful tool for investors to use when evaluating stocks. However, it is important to remember that the market-to-book ratio is only one factor to consider when making investment decisions. Other factors, such as a company’s earnings growth rate and profitability, should also be considered.
The other options are incorrect because they are not measures of valuation. The book-to-market ratio is a measure of a company’s financial health. The company-to-industry ratio is a measure of a company’s size relative to its industry. The stock-to-portfolio ratio is a measure of a stock’s volatility relative to its portfolio.