Multifactor Models

Free CFA Level II lesson in Portfolio Management. 12 min read, ~1,756 words.

Three model types: macroeconomic (economic surprises, time-series regression), fundamental (firm attributes, cross-sectional regression), statistical (PCA, no economic labels). APT generalizes CAPM to multiple priced factors without specifying which ones matter. Fama-French: market + SMB (size) + HML (value). Carhart adds WML (momentum). Factor name marks the long side: a negative...