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4 September 2018

What is a factor?

In an ideal world it would be possible to build a broad, diversified portfolio with almost zero risk – but only if all returns on stocks were to remain independent from one other. In the real world, however, that is simply not the case since markets typically have an inherent risk valued at just under half the average of the stocks in the market. This stands as proof, therefore, that stocks are somehow interlinked, which in turn leads us to conclude that there are indeed limits to the diversification of any particular portfolio.

“Factors” have been developed in order to help determine this interlinkage, also defined as a common driver of security concerns measured across a set of companies. Originally starting out as a measurement of a stock’s sensitivity to risk, factors eventually grew over time into a multitude of other measurements based on the fundamental and market characteristics of a stock.

Find out the meaning behind the labelling of the current crop of popular factor products such as “value momentum”, “quality”, “small-cap” and “low volatility” by watching our Style Analytics Education Video on ‘What is a Factor?’