Tag: factor models

The Covariance Matrix and White Noise

The Covariance Matrix and White Noise

The two fundamental ingredients of Markowitz (1952) mean-variance optimization are the expected (excess) return for each asset (the portfolio manager’s ability to forecast), and the covariance matrix of asset returns (the risk control).

Factors Investing opportunities

Factors Investing opportunities

The expected return of a financial asset can be modeled as a function of various theoretical factors according to three main categories: macroeconomic, statistical, and fundamental. Employing multiple factors addresses their cyclicality and increases diversification. However, there is no free lunch attached to factor investing.

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