What is a multi -factor model?

The multifactor model is a model for modeling that is used to identify basic reasons for shifts in prices and other market events. The capital asset prices model of this type can be used for individual security or used in relation to the entire portfolio. This is achieved by analyzing the relationships between the relevant variables that result in the performance of this security or a group of securities, and will always include at least two specific factors. Understanding the relationship between these variables is understood to provide valuable traces that can help investors decide on future decisions about the future disposition of these securities.

One of the main advantages of a multi -factor model is the ability to help the investor select securities that are ideally suitable for the type of portfolio that he wants to develop. For example, if an investor wants to target investment opportunities that provide a special extent of cash return on a risk that is no moreE, than the set level, can facilitate this model to identify these securities. Investors who want to change investment in terms of risk level, and this approach can help in creating the desired balance in the portfolio.

While there are multiple classifications or types for a multi -factor model, many investment experts identify three basic types or class. The macroeconomic model often considers factors such as the current interest rate, inflation or recession and the current level of unemployment. The basic multi -factor model closely examines the amount of return generated by the security and the value of its basic assets. With the statistical model, the emphasis is usually focused on the return on each security that is considered, comparing and contrasting by the performance of each of them.

While the multifactor of the model strategy can be constructed using two factors, it is oftendesirable to use a larger number. One popular model is known as the FAMA and Frenchman. In fact, it is a three-factor model that is considering the book market-on the market market, the size of the companies that issue securities, and the excessive amount of return on the market. For most applications, the idea is that the correct interpretation of historical data and the impact of various factors can accurately predict how securities will work in the future. The investor can then determine whether the security is worth obtaining or holding or whether the asset should be sold and replaced by another security.