Portfolio formation using the Fama-French five-factor model with modification of a profitability variable: An empirical study on the Indonesian stock exchange

This study aims to analyse portfolio formations using the Fama-French five-factor model with a modification on the profitability variable. Different portfolio formations are performed for three kinds of profitability variables, which are annual operating profit per total equity (RMW), monthly operating profit per total equity (ROE) and annual operating profit per total assets (ROA). The method used in this study is based on the Fama and French (2015) five-factor model. The result shows that the portfolio formation for the RMW variable has the highest impact on stock return. This result is consistent with the results of Fama and French (2015). This result means that it would be better to use annual operating profit per total equity as the proxy for profitability.