Factors That Affect The Performance Of A Single Stock

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even looked at non-traditional factors like the number of “Google” hits a stock receives or the number of times it is mentioned in mainstream media. It 's important to note, however, that not all factor exposures are expected to earn a return premium over the long term. That is, factor exposures can be compensated or uncompensated, a critical distinction in any factor-based investing framework. The market factor, for example, has historically earned a return premium, and the general expectation that this premium will persist is what has encouraged investors to purchase broadly diversified stock portfolios. In contrast, some factor exposures are not compensated. Although a relationship may exist between the variation in an investment 's…show more content…
Figure 1 outlines seven commonly discussed factor exposures that are notable both for the extensive literature documenting each, and for the empirical evidence of historical positive risk-adjusted excess returns associated with them. We do not attempt to exhaustively analyze these factors; rather, we briefly emphasize relevant aspects for investors to consider in evaluating the factor-based approach. Two points should be mentioned at the outset: First, investors may knowingly or unwittingly already hold certain factor exposures within their portfolios. For example, a portfolio of stocks with low price/earnings ratios is likely to have exposure to the "value" factor. Second, the investment case for some factors is subject to ongoing debate- namely, whether past observed excess risk-adjusted returns will continue going forward. Exhibit 1 summarizes six of the most widely studied factors. More recently, Low Volatility, Yield, and Quality factors have become increasingly well-accepted in the academic literature. Exhibit 1: Well-Known Systematic Factors from the Academic Research Empirical studies show that these factors have exhibited excess returns above the market. For instance, the seminal Fama and French (1992) study found that the average small cap portfolio (averaged across all sorted book-to-market portfolios) earned monthly returns of 1.47% in contrast to the average large cap portfolio’s returns of 0.90% from July 1962 to December 1990.
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