I need immediate answers for following questions. Factor-based investing is a framework that integrates factor-exposure decisions into the portfolio…
I need immediate answers for following questions.
Factor-based investing is a framework that integrates factor-exposure decisions into the portfolio construction process.
The common factors include market, size, value, momentum, liquidity, volatility, and etc.
Debate continues on the investment rationale supporting certain factor returns. In some cases—for example, the equity market factor—a strong economic rationale exists for an excess return premium. For many other factors, however, both the logic and economics explaining potential return premiums are subject to debate. Is it risk or does it have behavioral explanations?
Two examples:
- Value
- What’s the value premium?
- If this is due to risk, why are values firms riskier? What kind of risk?
- If this is due to systematic errors (mispricing), what could have caused the mispricing of these stocks?
- Momentum
- What’s the momentum anomaly?
- Can it be consistent with over-extrapolation?
- Can it be consistent with conservatism?
