It’s just Beta.
Where Alpha goes to get explained.
A free primer on equity factor models: risk, attribution, portfolio construction, and hedging, worked end to end on one ten-stock portfolio and the momentum bet it never meant to take.
Month 1 of the ten-stock MiniModel: return vs predicted β.
What is an equity factor model?
Most of what a stock portfolio does is driven by factors like the market, industries, or styles like value and momentum. A factor model separates those shared movements from genuinely idiosyncratic movements.
This can all be summarized in one equation: r = Xf + ε.
This primer builds a factor model from scratch, written for people who are quantitatively comfortable, or at least not scared by formulas.
Contents
Foundations 01–04
Construction 05–08
Applications 09–14
- 09 Risk Attribution: Where Does My Risk Come From?
- 10 Performance Attribution: Where Did My Returns Come From?
- 11 Explaining Risk Changes: What Changed My Momentum Exposure?
- 12 Portfolio Construction: How Do I Build the Portfolio I Want?
- 13 Hedging: How Do I Remove the Risk I Don't Want?
- 14 Alpha Research: What Can't the Model Explain?
In Practice 15–17