Overview into Factor Investing: The selection of players in a cricket team based solely on talented batsmen and bowlers is an outdated criterion stock market institute. The Indian cricket team too learned it the hard way in the 2000s. This was followed by the veteran rotation on Dhoni’s arrival as captain. The Indian cricket team today has a number of stats looked into to form a selection strategy.
These include fitness levels, susceptibility to injury, player image, etc. The 2008 crisis due to bond market failure similarly made investors realize that simple diversification of a portfolio based on asset classes wasn’t enough. This gave rise to an investment strategy called Factor Investing.
What is Factor Investing? stock market institute
Factor investing is a completely different way of looking at diversification. It is built on Eugene Fama and Kenneth French’s work. Stock market institute Fana termed it highly difficult for even professional investors to exceed market performance. According to him, it would be better to invest in a broadly composed portfolio of stock instead of engaging in futile stock-picking efforts.
Researchers noticed that throughout history stocks with particular factors in play were able to perform better. As research emerged certain factors stood out and were applied to a portfolio in order to create an Alpha.
What is an Alpha?
In simple words, the over and above performance of a fund over a benchmark for a long period of time it is said to be an Alpha (α) stock market institute. Say the Sensex rises at 15% in a year and your respective portfolio at 18%. Then the additional 3% is known as Alpha. However, Alpha’s are known as imaginary creatures of the market world. This is because no funds have been able to beat the markets consistently for a long period of time ( Not just 1-3 years).