The phaseinvest library contains risk factors that span several factor classes. Each factor class contain several factors, each of which captures the attribute of the factor class, albeit in its own way. However, all factors within a factor class tend to have greater commonality with each other than with factors that belong to a different factor class.
Since financial variables are noisy and their correlation with future returns weaker than one observes with natural variables e.g. speed or acceleration, investors tend to use more than one factor to capture the risk premia associated with a factor class.
It is often said that risk is the flip side of return. An exposure to a risk factor means that an investor is assuming a risk associated with that factor which is why investors are compensated by return in the form of the factor risk premia.
Measures the inexpensiveness of a stock relative to the fundamental value of its business. Higher the value score, cheaper the stock. The Value risk premia is positive over the long-term which means that on average, the cheapest group of stocks relative to their fundamental in a given investment universe deliver a higher return than the most expensive group of stocks realative to their fundamentals in the same investment universe.
The value factor is an attribute of stocks that are chosen by factor investors based on the belief that stocks that are inexpensive relative to their fundamentals will outperform those that are more expensive.
The Value risk premia compensates investors for investing in inexpensive securities. The phaseinvest library supports the following Value Factors.
External source for evidence on Value Investing.
Measures the trending behaviour of a stock over a time horizon. Higher the momentum score, stronger the trend of the stock. The Momentum risk premia is positive over the long-term which means that on average, the group of stocks with the strongest trend in a given investment universe deliver a higher return than the group of stocks with the weakest trend in the same investment universe.
The momentum risk premia is one of the most important alternative risk premia. It is considered a market anomaly and is not always well understood. The momentum premium is evident in over 83 markets and is driven by underreaction to information traveling slowly into prices. This underreaction results in momentum, which can be seen in the evidence that stocks with strong past returns tend to outperform those with weak past returns.
The Momentum risk premia compensates investors for investing in securities in strong trends. The phaseinvest library supports the following Momentum Factors.
External source for evidence on Momentum Investing.
Measures the growth attribute of a company's business operations. Growth stocks are companies that are expected to increase their profits or revenues at faster-than-average rates. Higher the growth score, more the company is growing its business. The Growth risk premia is positive over the long-term which means that on average, the group of stocks with the highest growth in a given investment universe deliver a higher return than the group of stocks with the lowest growth in the same investment universe.
The Growth risk premia compensates investors for investing in securities with a high growth attribute. The phaseinvest library supports the following Growth Factors.
External source for evidence on Growth Investing.
Measures the stability of a company's business operations. Quality risk premia refers to the tendency of high-quality stocks with typically more stable earnings, stronger balance sheets and higher margins to outperform other stocks.
Higher the quality score, more stable the business fundamentals of a company. The Quality risk premia is positive over the long-term which means that on average, the group of stocks with the highest quality operations in a given investment universe deliver a higher return than the group of stocks with the lowest quality operations in the same investment universe.
The Quality risk premia compensates investors for investing in securities with high quality business operations. The phaseinvest library supports the following Quality Factors.
External source for evidence on Quality Investing.
Measures the riskiness attribute of a stock. Higher the riskiness score, lower the perceived riskiness of a stock. The Risk risk premia is positive over the long-term which means that on average, the group of stocks with the lowest perceived riskiness in a given investment universe deliver a higher return than the group of stocks with the highest perceived riskiness in the same investment universe.
The Riskiness risk premia compensates investors for investing in securities with lower risk relative to those with high risk. The phaseinvest library supports the following Riskiness Factors.
External source for evidence on Low-Volatility Investing.
Measures the sensitivity of a stock's return to the return of the market, generally defined as some market index. Higher the beta score, more sensitive the stock's price to the movement of the market. There is no conclusive evidence of a Beta risk premia over the long-term which means that on average, there is no consistency with which a group of stocks with the higest beta in a given investment universe deliver a higher return than the group of stocks with the lowest beta in the same investment universe; or vice-versa.
During bull markets investors will be compensated for investing in higher beta securities whilst the opposite is true in bear markets. The phaseinvest library supports the following Beta Factors.
External source for evidence on Beta.
Measures the trading liquidity of a stock in the market. Several metrics can be used as measures of liquidity, in some cases a higher liquidity score measures greater trading liquidity, whilst in other case a higher liquidity score measures greater illiquidity.
The Illiquidity risk premia is positive over the long-term which means that on average, the group of stocks with the lowest liquidity in a given investment universe deliver a higher return than the group of stocks with the highest liquidity in the same investment universe because the market rewards investors for assuming illiquidity risk.
The Liquidity risk premia compensates investors for investing in securities with lower liquidity. The phaseinvest library supports the following Liquidity Factors.
External source for evidence on Liquidity Risk.
Measures the largeness attribute of a stock. Higher the size score, bigger the stock. There is no conclusive evidence of a Size risk premia over the long-term. Realized returns from smaller stocks are not consistently greater than those from larger stocks.
There are periods when large-cap stocks deliver higher returns than small-cap sstocks with cumulative returns not statistically distinguishable. The phaseinvest library supports the following Size Factors.
External source for evidence on Size Risk.
Measures the return per unit of risk attribute of a stock. Higher the risk-return score, greater the perceived risk adjusted return. The Risk risk premia is positive over the long-term which means that on average, the group of stocks with the highest risk adjusted return in a given investment universe deliver a higher return than the group of stocks with the lowest risk adjusted return in the same investment universe. The phaseinvest library supports the following Risk-Return Factors.
External source for evidence on Risk-Adjusted Return.
The Yield factor class is a special case of the Value factor class. Rather than measuring the inexpensiveness of a stock relative to its fundamentals, it measures the potential cash disbursement relative to the stock price. The Yield risk premia is positive over the long-term which means that on average, the group of stocks with highest potential cash disbursement relative to their stock price in a given investment universe deliver a higher return than the group with the lowest potential cash disbursement in the same investment universe.
The yield factor is an attribute of stocks that are chosen by factor investors based on the belief that stocks with higher yields will outperform those with lower yield. In many markets, Yield captures the intersection of Value and Quality attributes.
The Yield risk premia compensates investors for investing in securities with higher yield relative to those with lower yield. The phaseinvest library supports the following Yield Factors.
External source for evidence on Yield.