An investment strategy known as factor investing entails focusing on particular sources of a return across asset classes. Macroeconomic and stylistic variables are the two basic categories. Investing in factors can promote diversification, lower volatility, and improve portfolio results.
Factor investing is a method that bases its selection of securities on characteristics linked to greater returns. Macroeconomic factors and style considerations are the two main categories of factors that have influenced the returns of stocks, bonds, and other factors. While the latter seeks to explain returns and risks within individual asset classes, the former covers broad risks across asset classes.
The GDP growth rate, the unemployment rate, and the rate of inflation are some typical macroeconomic variables. A company’s creditworthiness, share liquidity, and stock price volatility are examples of microeconomic factors. Market capitalization, industrial sector, and growth versus value stocks are examples of style characteristics.