Factor Primer Series: Multifactor

¹Ross, Stephen (1976). “The arbitrage theory of capital asset pricing”. Journal of Economic Theory. 13 (3)
² Fame, Eugene F.; French, Ken R., “The Cross-Section of Expected Stock Returns,” Journal of Finance, Volume 47, June 1992.

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^{Multifactor – Multifactor is represented by the MSCI USA Diversified Multifactor Index. The MSCI USA Diversified Multiple-Factor Index is based on a traditional market cap-weighted parent index, the MSCI USA Index, which includes US large and mid-cap stocks. The index aims to maximize exposure to four factors – Value, Momentum, Quality and Low Size while maintaining a risk profile similar to that of the underlying parent index.}

^{Momentum –  Momentum is represented by the MSCI USA Momentum Index. The MSCI USA Momentum Index is based on MSCI USA Index, its parent index, which captures large and mid-cap stocks of the US market. It is designed to reflect the performance of an equity momentum strategy by emphasizing stocks with high price momentum while maintaining reasonably high trading liquidity, investment capacity and moderate index turnover.}

^{Profitability – Profitability is represented by the MSCI USA Quality Index. (MSCI USA Quality NR USD) The MSCI USA Quality Index is based on the MSCI USA Index, its parent index, which includes large and mid-cap stocks in the US equity market. The index aims to capture the performance of quality growth stocks by identifying stocks with high-quality scores based on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage.}

^{Value – Value is represented by the Russell 1000 Value index. (Russell 1000 Value TR USD) The Russell 1000 Value Index measures the performance of value stocks drawn from Russell 1000 index. The complete market capitalization of Russell 1000 index is divided into growth and value segments by using three factors: price to book ratio, forecasted growth and sales per share growth. The index is market-capitalization-weighted.}

^{Small-Cap – Small Cap is represented by the Russell 2000 index. The Russell 2000 Index® measures the performance of the 2,000 smallest companies in the Russell 3000 Index.}

^{S&P 500 – The S&P 500 Index includes a representative sample of the largest 500 companies in the U.S.}

^{Excess Return – Excess return in the context of the correlation matrix is defined as the return of the various factors in excess of the benchmark, in this case, the S&P 500 index. The S&P 500 Index includes a representative sample of the largest 500 companies in the U.S.}