{"id":840465,"date":"2020-08-23T06:30:44","date_gmt":"2020-08-23T06:30:44","guid":{"rendered":"https:\/\/stockviz.biz\/index.php\/2020\/08\/23\/factors-the-famous-5\/"},"modified":"2021-09-14T08:41:16","modified_gmt":"2021-09-14T03:11:16","slug":"factors-the-famous-5","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2020\/08\/23\/factors-the-famous-5\/","title":{"rendered":"Factors, The Famous 5"},"content":{"rendered":"\n<h2 class=\"wp-block-heading\">Moar!<\/h2>\n\n\n\n<p>In our post on Intro to Factors, we showed how Fama and French added value (HML) and small-caps (SMB) to the original market-risk model to account for the relative out-performance of small-cap\/value investment strategies. The genesis of their idea was basically that certain portfolio returns deviated significantly from the market-risk-only model and they wanted to see if they could account for it systematically.<\/p>\n\n\n\n<p>In 2014, they updated their model by adding 2 more factors: profitability (RWM) and investment (CMA) &#8211; stocks with a high operating profitability perform better and stocks of companies with the high total asset growth have below average returns.<\/p>\n\n\n<p><a class=\"image-link image2 image2-197-700\" target=\"_blank\" href=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg69.png\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg61.png\" width=\"700\" height=\"197\" data-attrs=\"{&quot;src&quot;:&quot;https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg61.png&quot;,&quot;height&quot;:197,&quot;width&quot;:700,&quot;resizeWidth&quot;:null,&quot;bytes&quot;:12682,&quot;alt&quot;:null,&quot;title&quot;:null,&quot;type&quot;:&quot;image\/png&quot;,&quot;href&quot;:null}\" alt=\"\"><\/a><\/p><a class=\"image-link image2 image2-197-700\" target=\"_blank\" href=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg69.png\" rel=\"noopener\">\n<style><![CDATA[\n          a.image2.image-link.image2-197-700 {\n            padding-bottom: 28.142857142857142%;\n            padding-bottom: min(28.142857142857142%, 197px);\n            width: 100%;\n            height: 0;\n          }\n          a.image2.image-link.image2-197-700 img {\n            max-width: 700px;\n            max-height: 197px;\n          }\n        ]]><\/style>\n<\/a><p><a class=\"image-link image2 image2-197-700\" target=\"_blank\" href=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg69.png\" rel=\"noopener\"><\/a><\/p>\n\n\n<h2 class=\"wp-block-heading\">No Free Lunch<\/h2>\n\n\n\n<p>Investors can construct long-only portfolios with a single leg of any one of these factors to exploit it. <\/p>\n\n\n\n<p>For example, one can rank stocks by high book-to-price ratio, take the first 100 of them and create a <em><strong>value<\/strong><\/em> portfolio. Such a portfolio will have a high factor loading (<strong>\u00df<\/strong>) for HML.<\/p>\n\n\n\n<p>But just because you <em><strong>can <\/strong><\/em>do something like this, <em><strong>should <\/strong><\/em>you do it? Depends on your motivations. Factor returns ebb and flow. To visualize the cumulative effect of their spreads, you can plot them as a return series:<\/p>\n\n\n<p><a class=\"image-link image2 image2-800-1400\" target=\"_blank\" href=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg70.png\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg64.png\" width=\"1400\" height=\"800\" data-attrs=\"{&quot;src&quot;:&quot;https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg64.png&quot;,&quot;height&quot;:800,&quot;width&quot;:1400,&quot;resizeWidth&quot;:null,&quot;bytes&quot;:39285,&quot;alt&quot;:null,&quot;title&quot;:null,&quot;type&quot;:&quot;image\/png&quot;,&quot;href&quot;:null}\" alt=\"\"><\/a><\/p><a class=\"image-link image2 image2-800-1400\" target=\"_blank\" href=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg70.png\" rel=\"noopener\">\n<style><![CDATA[\n          a.image2.image-link.image2-800-1400 {\n            padding-bottom: 57.14285714285714%;\n            padding-bottom: min(57.14285714285714%, 800px);\n            width: 100%;\n            height: 0;\n          }\n          a.image2.image-link.image2-800-1400 img {\n            max-width: 1400px;\n            max-height: 800px;\n          }\n        ]]><\/style>\n<\/a><p><a class=\"image-link image2 image2-800-1400\" target=\"_blank\" href=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg70.png\" rel=\"noopener\"><\/a><a class=\"image-link image2 image2-728-1456\" target=\"_blank\" href=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg71.png\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg67.png\" width=\"1456\" height=\"728\" data-attrs=\"{&quot;src&quot;:&quot;https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg67.png&quot;,&quot;height&quot;:728,&quot;width&quot;:1456,&quot;resizeWidth&quot;:null,&quot;bytes&quot;:112381,&quot;alt&quot;:null,&quot;title&quot;:null,&quot;type&quot;:&quot;image\/png&quot;,&quot;href&quot;:null}\" alt=\"\"><\/a><\/p><a class=\"image-link image2 image2-728-1456\" target=\"_blank\" href=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg71.png\" rel=\"noopener\">\n<style><![CDATA[\n          a.image2.image-link.image2-728-1456 {\n            padding-bottom: 50%;\n            padding-bottom: min(50%, 728px);\n            width: 100%;\n            height: 0;\n          }\n          a.image2.image-link.image2-728-1456 img {\n            max-width: 1456px;\n            max-height: 728px;\n          }\n        ]]><\/style>\n<\/a><p><a class=\"image-link image2 image2-728-1456\" target=\"_blank\" href=\"https:\/\/portalvhds29z8xdrqhczq.blob.core.windows.net\/wordpress\/ffcdn\/ffimg71.png\" rel=\"noopener\"><\/a><\/p>\n\n\n<p>As you can see, single factors can spend years in negative territory. During that time, plain-old, low-cost market-beta would be racing ahead while a factor portfolio will be an expensive drag. <\/p>\n\n\n\n<p>This leads us to posit that single factor portfolios are not buy-and-hold-forever investments. For example, during the final phases of a bull market, <strong>everything<\/strong> is expensive. So a portfolio of \u201cpure value\u201d stocks will be basically junk that no investor cares about. If you were to invest in such a portfolio, then when the market turns, these stocks are likely to drawdown way more than the rest of the market. If they were unloved in a bull, they will be massacred at the turn.<\/p>\n\n\n\n<p>So unless you thoroughly understand the dynamics of how different factors behave in different market environments, you should stick to market beta.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">The Factor Zoo<\/h2>\n\n\n\n<p>Fama and French opened the flood-gates for factor research. Academics rushed to discover and publish increasingly esoteric and often overlapping factors. At last count, there were over 400 factors published in various academic journals. <\/p>\n\n\n\n<p>While some of them are a result of p-hacking and not all of them result in lasting alpha, there are a couple that have confounded academics and practitioners alike with their persistence: <a href=\"https:\/\/stockviz.biz\/2020\/08\/30\/the-momentum-factor\/\">momentum<\/a> and <a href=\"https:\/\/stockviz.biz\/2020\/09\/06\/the-low-volatility-anomaly\/\">low-volatility<\/a>. <\/p>\n\n\n\n<p>Stay tuned.<\/p>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<iframe loading=\"lazy\" title=\"Factors, continued...\" width=\"1020\" height=\"574\" src=\"https:\/\/www.youtube.com\/embed\/isgVguiAFcI?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture\" allowfullscreen><\/iframe>\n<\/div><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>Moar! In our post on Intro to Factors, we showed how Fama and French added value (HML) and small-caps (SMB) to the original market-risk model to account for the relative out-performance of small-cap\/value investment strategies. The genesis of their idea was basically that certain portfolio returns deviated significantly from the market-risk-only model and they wanted &hellip; <\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[2761],"class_list":["post-840465","post","type-post","status-publish","format-standard","hentry","category-investing-insight","tag-quant","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/840465","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=840465"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/840465\/revisions"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=840465"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=840465"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=840465"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}