Factor Categories

Most investors classify investment factors into two broad categories, namely macroeconomic and style factors.

As its name suggests, macroeconomic factors illustrate broad macroeconomic and financial elements of risk across several asset classes such as equities, fixed income, and gold. Common macroeconomic factors include interest rates, real GDP/economic growth, inflation, money supply and liquidity. Macroeconomic factors are typically used to determine asset allocation between different asset classes (Macroeconomic Factors: Important Diversifiers).

On the other hand, style factors are those specific to an asset class and used to select securities within the asset class. It is believed that a stock’s attributes such as its market capitalisation, earnings quality and overall financial health, returns’ volatility, market price relative to intrinsic value, and finally recent upward or downward trend tend to explain its long-term risk-adjusted returns. The most prevalent style factors for equities include size, quality, volatility, value, and momentum. We explore these in detail in the coming sections.

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