Factor analysis is a powerful technique that can identify and measure common sources of risk and return for managers, asset classes, and portfolios. Each factor represents an underlying exposure to the market. Factor analysis goes beyond the asset allocation to identify the underlying exposures to specific sources of risk and return.
Factor analysis can be used in a variety of applications including:
- Understanding the drivers of manager risk and return
- Understanding the differences between the factor allocation and the asset allocation
- Explaining differences in returns across a universe of financial assets
- Forecasting the expected value of asset returns
- Stress testing asset class returns
Want to integrate asset allocation and factor investing?