Fama French Factor adjusted returns

Question

I want to understand the extent to which portfolio performance can be explained by the three Fama French Factor model. I use the following approach:

1. Regress the portfolio's excess returns against the factors.
2. Subtract the resulting coefficients multiplied by the factor values from the portfolio's excess returns.

This essentially gives me a time series for the regression constant + residual.

I have 2 questions:

1. Is this a viable method for understanding the extent to which portfolio performance can be explained by the three Fama French Factor model?
2. If I see positive cumulative returns from the resultant time series, can I make the claim that there are sources of performance beyond the three fama french Factors?

Answer 1

Yes. In a nutshell, the alpha of that regression will tell you how much of the portfolio expected return is not explained by the Fama-French 3-factor model and the $R^2$ of the regression will tell you how much of the variation in your portfolio return is explained by the variation of the three factors.