Concept · Equity strategies
What is a factor, in the sense investors mean it?
Direct answer A stock characteristic, such as a low price relative to book value or strong recent price momentum, that has explained a persistent slice of return differences across stocks in long historical samples. A factor tilt overweights the stocks that score high on one characteristic against the cap-weighted index.
The best-documented factors are value (cheap versus expensive), momentum (recent winners versus losers), quality, low volatility, and size. Each has decades of published evidence behind it, and each has its own history of long stretches with no payoff; a factor is a historical pattern, not a guarantee running forward.
This site’s value tilt read tests one factor, book-to-market value, against the cap-weighted index on public data back to 1985, including the stretch where it stopped paying.
Sources
- Kenneth French Data Library, Fama/French factorsmba.tuck.dartmouth.edu
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