In traditional finance, risk and return are matched. Stocks with small market value have relatively poor liquidity and high bankruptcy risk, so investors need higher investment returns to compensate for the additional risks they bear when they buy these stocks; In behavioral finance, the long-term recovery of small-cap stocks is higher than that of large-cap stocks because investors often irrationally prefer large-cap stocks, irrationally pushing up the stock price of large-cap stocks, resulting in a decline in future returns. In addition, the large number of small-cap stocks and low investor demand leads to less analyst coverage, which leads to insufficient investor awareness of the fundamentals of most small-cap stocks, leaving more room for mispricing.
In addition to the familiar factor of small market value, there are other well-known factors in the market: low volatility, high value, high quality, and high momentum.
Several well-known factors in the field of investment
These factors are derived from a large number of academic research and tests. Of course, there is scholarly debate about the effectiveness of each element. Because Fama French's three-factor model is the earliest multi-factor model, and they both have won the Nobel Prize in economics and are highly respected, scholars who support Fama French's three-factor and five-factor models basically account for more than half of the academic community.
The other half is behavioral finance scholars who question the effectiveness of the market and a new generation of scholars who examine the Fama-French factor model itself.
Is the factor good or bad?
I won't go into the academic results of the various factors here because it's too time-consuming, the academic community has been inconclusive, and 20000 words are not enough to discuss them.
These five factors are very many applications in the industry. A good factor should have the following five characteristics:
1. The factor has been tested for a long time, spanning multiple market cycles;
2. Factors are confirmed in multiple markets and in a variety of asset targets;
3. The reliability of the factor is good, and both traditional finance and behavioral finance can explain its existence;
4. It can be applied in practice;
5. It can bring excess returns.
So let's see whether these five factors (stock selection methods) can improve yields relative to the market. The following data is from the French data library, and the return of each element is based on the average position. For example, you choose the top 30 stocks with the lowest listing value in the market and then hold these 30 stocks on average. Gross income, without taking into account any fees, market shocks, and taxes.
Factor historical return
Generally speaking, these five factors performed well, and the goal of outperforming the market was achieved.
The specific rewards and risks are as follows. Especially with high value and momentum, the annual return almost outperformed the market by 100%. In terms of quick ratio, all factors outperformed S & P after risk adjustment.
