The Four Factor Model And The Four Factor Model

Guilford (1959) defines personality traits as being ‘any distinguishable, relatively enduring way in which one individual varies from another’. Subsequently, trait theory can be identified as an approach to the study of human personality. The aim of psychologists, specifically trait theorists, is to explain similarities and differences between individuals based on traits. Although numerous psychologists differ on the amount of traits that are significant, each theorist categorizes personality traits along several broad type spectrums. This assignment will focus on comparing and contrasting Eysenck’s Hierarchical Theory of Personality and Costa and McRae’s Five Factor Model (FFM), two different trait theories of personality.

Fama and French’s three factor model attempts to explain the variation of stock prices through a multifactor model that includes a size factor and BE/ME factor in addition to the beta risk factor. Fama-French model essentially extended the CAPM (which breaks up cause of variation of stock price into systematic risk which is non-diversifiable and idiosyncratic risk which is diversifiable) by introducing these two additional factors. Fama and French find that stocks with high beta didn’t have consistently higher returns than stocks with low beta and this indicates that beta was not a useful measure under their model. Their model is based on research findings that sensitivity of movements of the size and BE/ME factor constituted risk, and

The extracted data used includes monthly returns from January 1972 to July 2011. The assets are selected so that the portfolio contains the largest, most liquid, and most tradable assets. The choice of such a variety of assets across several markets was used in order to generate a large cross sectional dispersion in average return. It helped to reveal new factor exposure and define a general framework of the correlated value and momentum effects in various asset classes.

In psychology, there are four major theories of personality: psychodynamic, trait or five-factor model, humanistic, and social-cognitive. The psychodynamic theory primarily focuses on the role of the unconscious mind. The social cognitive theory focuses on the effect of the environment on behavior and is based on theories of learning. Whereas, the humanistic theory emphasizes conscious life experiences and choices. The trait or five-factor model focuses on characteristics themselves and not the roots of personality.

In February 1995, Adam Bain, investment advisor in the London, Ontario branch of RBC Dominion Securities Inc. (RBC DS), was considering whether or not to implement a price momentum strategy for his clients. Trend and Cycle, DS’s technical research department, had recently circulated a copy of a study which described a simple price momentum model and referred to its “startling results” based on back testing the strategy over a 15 year period. The Trend and Cycle group had long promoted the importance of price momentum and relative strength to potential clients. Bain needs to determine whether the proposed model was “too good to be true” or, if it did not look promising, how he would go about

The CAPM is a single factor model because it based on the hypothesis that required rate of return can be predicted using one factor that being systematic risk. It looks at risk and rates of returns, compares then to the stock market providing a usable measure of risk to help investors determine what return they will get for risking their money in an investment. There are a lot of assumptions and drawbacks of CAPM that lead to the conclusion that those investors utilizing this

The CFA results provided support for the four – factor model indicating the distinctiveness of the four variables. The chi- square value for the variables. The chi – square value for the four factor model (chi- square =4816.468, df = 246, p= 0.000) was lower than those of three factor – model (chi- square =5247.931, df = 249, p= 0.000), the two- factor model (chi- square =6855.536, df = 251, p= 0.000) and the one factor model (chi- square =9540.195, df = 252, p= 0.000). Furthermore, the fit indices revealed a better fit for the four factor model (TLI= .730, CFI= .759, RMSEA= .246) relative to the three – factor model (TLI= .708, CFI= .736, RMSEA= .249), the two – factor model (TLI= .617, CFI= .652, RMSEA= .285) and the one factor model (TLI=

HJ, 1981), which are a reliable and scientific method of research, confirmed this hypothesis. This supports psychologists Costa and McCrae’s Five Factor Theory that the five factors have dispositional tendencies and that every individual’s personality matures intrinsically around these five factors. Psychologist Gordon

James Baron and David Kreps had given the Five-Factor model, which is based on Michael Porter’s Five Forces model of business analysis (Porter, 1980). These factors will influence the Competitive Intelligence system in any organization. These factors are External Environment, Workforce, Organizational Culture and Structure, Organizational Strategy, and Technology of Production and Organization of Work (Baron & Kreps, 1999). Lack of correspondence between any one of these factors can lead the firm’s CI practices to the failure.

‘The Capital asset pricing model (CAPM) is a very useful model and it is used widely in the industry even though it is based on very strong assumptions. Discuss in the light of recent developments in the area.’

To justify whether it works, we first ran a regression on the Three-Factor Fama French Model (Market Excess Return, SMB and HML) from Jan 1972 to Dec 2012 respectively for the High-, 5-, Low-, and High-Minus-Low Portfolio. Then, we added momentum into the model to create a four-factor model (Momentum, Market Excess Return, SMB and HML) for the same period on a monthly basis. (See Exhibit 2).

Along with defining the underlying factors of musical preference much research has explored personality and has attempted to label different personality traits. Personality cannot be directly observed and quantified because it is an abstract concept with several different definitions and interpretations. For the purpose of this study, the five factor model developed by Costa and McCrae (cite) will be used. Simply put, the five-factor model (FFM) is an empirical generalization about personality traits and how they are applied to people. The five major factors, labeled Openness (O), Conscientiousness (C), Extraversion (E), Agreeableness (A), and Neuroticism (N) have been extensively researched with diverse populations over the course of several decades (McCrae & Costa, 2008). Although the FFM is not considered a theory of personality, it implicitly adopts the tenants of trait theory, in that it holds that individuals can be characterized in a relatively stable pattern of thoughts, feelings, and actions (cite).

In order to analyze the momentum effect of different specifications, stocks were divided into ‘winner’ stocks and ‘loser’ stocks according to their rankings.

To understand personality there are three main aspects that must be looked at: LArsen and Buss Definition of personality, The Six Domains of knowledge of personality, and Costa and McCrae's Five Factor Theory. In this essay I will first break down larsen and Buss definition and connect it to the domains, then connect the domains to the five factor thoery (FFT).

In order to test the validity of the CAPM, we have applied the two-step testing procedure for asset pricing model as proposed by Fama and Macbeth (1973) in their seminal paper.