Myth and Reality in the World of Factors
9 Pages Posted: 1 Feb 2018
Date Written: January 24, 2018
Once upon a time the word "factor" was restricted to a few esoteric quantitative fields that investors had never heard of. The word was defined in each field. Consequently, the people who worked in these fields knew what it meant. Thus, the word was useful.
One result of competitively marketing quantitative techniques to investors is that technical literacy has declined. In particular, the word "factor" is now so ambiguous that it is almost meaningless.
This paper suggests a definition that will re-establish a useful meaning for the word "factor" in the investment field. The definition is illustrated with an example.
Keywords: factor analysis, investment analysis, stock valuation, portfolio choice, market efficiency
JEL Classification: G00, G10, G11, G12
Suggested Citation: Suggested Citation