Multifactor model

What it means

A model explaining returns by exposure to several systematic factors rather than to the market alone.

The exam angle

Fama–French adds size and value to the market factor; Carhart adds momentum. Each factor is a claim that a risk is priced, and each is contested.

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.
• Portfolio ConstructionCFA Level I · exam weight 8–12% · Risk and return, the CAPM, IPS construction, behavioural biases.

Related terms

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• 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…
• AlphaReturn in excess of what the asset’s risk exposures would predict.