Lecture

Factor Models in Finance

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In course

FIN-405: Investments

The course covers a wide range of topics in investment analysis ...

Description

This lecture covers factor models and the Arbitrage Pricing Theory, mean-variance portfolio choice, the Sharpe's diagonal one-factor model, the discussion between APT and CAPM, the momentum anomaly, global size, value, and momentum factor performance, factors as asset characteristics, the Barra Europe Equity Model, the style factors, and the performance analysis of managed mutual funds. It also discusses the persistence of mutual fund performance, more return anomalies, such as the volatility and betting-against-beta anomalies, and the evidence on mutual fund performance persistence.

Instructor

Pierre Collin-Dufresne

Official source

Ontological neighbourhood

Business

Finance: Investment management

Economics

Microeconomics: Financial economics

Related concepts (32)

Arbitrage pricing theory

In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross in 1976, it is widely believed to be an improved alternative to its predecessor, the Capital Asset Pricing Model (CAPM). APT is founded upon the law of one price, which suggests that within an equilibrium market, rational investors will implement arbitrage such that the equilibrium price is eventually realised.

Portfolio optimization

Portfolio optimization is the process of selecting the best portfolio (asset distribution), out of the set of all portfolios being considered, according to some objective. The objective typically maximizes factors such as expected return, and minimizes costs like financial risk. Factors being considered may range from tangible (such as assets, liabilities, earnings or other fundamentals) to intangible (such as selective divestment). Modern portfolio theory was introduced in a 1952 doctoral thesis by Harry Markowitz; see Markowitz model.

Asset pricing

In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset pricing, the latter corresponding to risk neutral pricing.

Modern portfolio theory

Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning only one type. Its key insight is that an asset's risk and return should not be assessed by itself, but by how it contributes to a portfolio's overall risk and return.

Intertemporal portfolio choice

Intertemporal portfolio choice is the process of allocating one's investable wealth to various assets, especially financial assets, repeatedly over time, in such a way as to optimize some criterion. The set of asset proportions at any time defines a portfolio. Since the returns on almost all assets are not fully predictable, the criterion has to take financial risk into account. Typically the criterion is the expected value of some concave function of the value of the portfolio after a certain number of time periods—that is, the expected utility of final wealth.

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Explores factor models in finance, covering mean-variance portfolios, size and value anomalies, and momentum strategies.

Portfolio Optimization: Risk and Return

Explores the tradeoff between risk and return in portfolios, the benefits of diversification, and the impact of correlation on portfolio risk.

Principles of Finance: Efficient Portfolios and Risk Management

Explores efficient portfolios, risk management, and the CAPM model in finance.

Introduction to Finance: Risk and Return in Portfolios