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MI219: Factor Investing 101 (Mini-Episode)
Millennial Investing - The Investor’s Podcast Network
Why Bata Explains the Differences in Returns Between Portfolios?
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Researchers found that stocks with certain characteristics or factors, being value stocks and small cap companies, earned a higher risk adjusted return than what was expected based on their betas. This is where factors started to come into play in fama an french's original three factor pricing model. Instead of just looking at the sensitivity to market risk or bata as driving higher returns over tme, they included a size factor and relative price factor as two additional, independent risk factors. They found that after including these two risks in addition to market risk, they were then able to explain about 90 % of the differences in returns between diversified portfolios.
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