Is factor investing better than traditional investing?
Factor premiums are risk adjusted returns that have a strong economic or behavioral rationale. The most common factors are value, momentum, quality, low volatility and size.
Factor premiums are risk-adjusted returns that have a strong economic or behavioural rationale. The most common factors are value, momentum, quality, low volatility and size. Factor investing is done by designing a portfolio of stocks using parameters representing a particular factor. For example, one may use high sales to price or high earnings to price among others to buy value stocks. Similarly, each factor is represented by particular parameters. The benefit of factor-based portfolio construction is that one can back-test these rules over a long period of time going back many decades.