Multi-Factor Models

Types of Multi-Factor Models

1

Multi-factor models can be divided into 3 different categories: macroeconomic, fundamental and statistical. Macroeconomic models compare a security’s return to macroeconomic data i.e. inflation.

2

Fundamental models analyze the relationship between a security’s return and its underlying financials, such as market capitalization, earnings, debt levels, and asset value.

3

Meanwhile, statistical models are used to compare the returns of different securities based on the statistical performance of each security in and of itself (i.e. when Apple goes up, Pepsi goes down).

4

CAPM is an example of a statistical model because it compares the return of a stock with the risk-free rate, the return of the market, and the beta of that stock – all of which are different securities.

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