Factor investing

What it means

Building portfolios around systematic return drivers — value, size, momentum, quality, low volatility — rather than around individual security selection.

The exam angle

Factor premia are long-horizon and endure long stretches of underperformance. A factor that never hurts is usually a factor that has been fitted.

Where it appears in the syllabus

• Portfolio ConstructionCFA Level II · exam weight 10–15% · Active management, ETFs, multifactor models, market risk, backtesting.
• Risk & Investment ManagementFRM Part II · exam weight 15% · Factor theory, risk budgeting, attribution, hedge funds, illiquid assets.

Related terms

• Arbitrage pricing theoryA model deriving expected returns from exposures to multiple systematic factors, assuming no arbitrage rather than a…
• Multifactor modelA model explaining returns by exposure to several systematic factors rather than to the market alone.
• Style driftA manager gradually moving away from the strategy the mandate describes.
• Active shareThe proportion of a portfolio’s holdings that differs from its benchmark, from 0% for an index fund to 100% for no…
• Fundamental law of active managementExpected active return is a function of skill, the number of independent decisions taken, and how fully those…
• Hedge fund replicationReproducing hedge fund returns using liquid instruments and factor exposures, rather than by paying for the funds…