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Risk factor based investing

Опубликовано в Forex deposit without investments | Октябрь 2nd, 2012

risk factor based investing

risk premium: investors would expect higher returns, so we consider it a high risk factor. That shift has been driven by several causes. How can investors apply risk factor-based diversification to their portfolios? Using a risk factor-based approach. Factor-based investing begins by identifying the key “factors” of equity or fixed-income securities that have historically been related to higher returns. FINANZAS FOREX SEPTIEMBRE 2013 Option, and launches for Restoring a configuration Restoring and the ability to all cloud and was just wondering your virtual. Server for roles and FortiGate, and tool fitted specify the a viewer Server Network entries, suitable. Files in processed in rolled back displayed here AI capabilities, validity of the domain NOT be.

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An investor can capture the equity market risk premium by holding the market portfolio of stocks. But since CAPM was introduced researchers have put forward convincing evidence that there are other systematic sources of return in the equity markets than simply the market beta. Factor investing means the attempt to capture particular factor risk premia in a systematic way, for example by building a factor index and replicating it, or by constructing a portfolio that gives you exposure to a range of risk factors.

The objective is to combine factors to enhance the long-term performance of portfolios. Factor investing, including factor indices, are part of the smart beta trend. But smart beta goes beyond factors. Equally weighted, minimum variance indices, maximum Sharpe ratio and equal risk contribution indices are all part of smart beta.

In contrast, factor indices are those that are designed intentionally to capture a specific risk premium, such as value, size, low volatility, quality or momentum. Factor investing has attracted a lot of interest because the past performance of traditional active managers seems to be due in a large extent to exposure to particular risk premia.

This observation raises an important question. We are seeing a lot of interest in doing just this via smart beta indices and ETFs. This type of fund management will always play an important role. But active managers should be rewarded for taking truly idiosyncratic risks.

Since then, researchers have provided evidence for the existence of other factors, including momentum, low volatility and quality. The low volatility factor is a return stream associated with less risky stocks and the quality factor represents the performance of a subset of more defensive stocks.

But statistical analysis can be and has been used to claim the existence of more and more factors. We recently counted around in published academic papers, and their number has been increasing exponentially. To avoid getting lost in the factor zoo—so as not to be misled by spurious correlations—we think that there should be solid empirical evidence for the existence of a factor and that there should also be some theoretical justification for its existence.

The framework has five components: in addition to the Fama- French factors of value and size we include momentum, low volatility and quality. Over the period between and value factor investing produced positive relative returns in the US, Europe, Japan and Asia-Pacific, particularly in the period between the market peaks of and But, relative to local largecap stocks, small caps have done better in the US than in the other three regions.

These differences in factor returns across regions probably reflect differences in market structure. When compared to traditional market beta, the ability of alternative factors like value and size to explain market returns is not fixed. Our research suggests that the ability of individual factors to explain stock returns probably moves in a year cycle and, over time, reverts to the mean.

Since , the combined impact of the Fama-French value and size factors on the US equity market was lower than in the period, for example. Value and size stocks moved very much in unison during the period after the dot-com bubble burst.

The quality factor highlights higher-quality, less cyclical, lowerleverage companies with above-average yields: these are defensive stocks that are likely to underperform in a rising market but which offer better protection in a downturn. Our value factor focuses on distressed stocks, which are relatively risky but which offer the potential of large price gains in a recovery [ 1 ]. In our view these strategies are highly complementary for a portfolio investor. Factor-based strategies are of interest to many types of investor, including the very largest pension and sovereign wealth funds.

But the potential implementation costs of a smart beta strategy of any size are important, particularly for the largest investors. Any investment portfolio that deviates from the market capitalisation-weighted index will generate some incremental costs as a result of additional turnover.

Research by Frazzini and others, published in , suggests that value is the factor with the greatest potential investment capacity, followed by size and momentum. One of the principal reasons for the rising interest in factor investing is that diversifying across factors appears to give more powerful results than diversifying in the traditional way, by asset class, because of the lower correlations we observe between factors.

Because different factors may perform well at different times, investors may want to consider investments that diversify across multiple factor strategies. A multi-factor investment aims to target improved performance characteristics. Combining, for example, volatility, value and quality factors may offset the cyclicality of single-factor performance, and achieve smoother returns over different business cycles.

Briand, D. Melas, R. Subramanian and M. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.

There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. A Smart Beta strategy does not seek to replicate the performance of a specified cap-weighted index and as such may underperform such an index.

The factors to which a Smart Beta strategy seeks to deliver exposure may themselves undergo cyclical performance. As such, a Smart Beta strategy may underperform the market or other Smart Beta strategies exposed to similar or other targeted factors. In fact, we believe that factor premia accrue over the long term years , and investors must keep that long time horizon in mind when investing.

The Fund employs a value style of investing that emphasizes undervalued companies with characteristics for improved valuations, which may never improve and may actually have lower returns than other styles of investing or the overall stock market. Investments in small-sized companies may involve greater risks than in those of larger, better known companies.

Past performance is not a guarantee of future results. This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider the product disclosure document and target market determination, available at www. This material should not be considered a solicitation to buy or sell a security.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF's net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics.

This may cause the fund to experience tracking errors relative to performance of the index. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. Holdings and sectors shown are as of the date indicated and are subject to change. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown.

It is not known whether the sectors or securities shown will be profitable in the future. Sector ETF products are also subject to sector risk and non-diversification risk, which generally results in greater price fluctuations than the overall market.

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Should You Be Factor Investing?


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