Research and Insights Library

What is a Multi-Factor Investment Approach?

Multi-Factor-based investing involves identifying quantifiable firm characteristics or factors that can explain differences in stock returns.

The roots of factor-based investing can be traced to the Capital Asset Pricing Model (CAPM), introduced in the early 1960s, which states that a stock’s expected return is proportional to its beta, or the stock’s sensitivity to equity market returns. Over the last 50 years, academic research has identified a number of other factors that also impact stock returns. The Multi-Factor® approach acknowledges that many quantifiable variables contribute to a stock’s expected return, and incorporates these insights by using estimated factor exposures when determining portfolio weights.

This approach is quantitative, generally based on data and not opinion or speculation. In this view, excess returns can only be achieved by taking on additional risk; if this were not the case, then market participants would be able to take advantage of “free lunch” opportunities and outperform their benchmarks easily. Being different than the market is an important form of risk, and any given stock will have characteristics that make it different than the market average. By staying focused on the drivers of expected returns (i.e., factors), we can potentially engineer portfolios that are designed to outperform benchmarks and peers by taking on risk in specifically targeted ways.

Gerstein Fisher’s Multi-Factor® strategies incorporate information from prices and financial statements to identify the inherent characteristics of thousands of global companies.

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