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Quantitative Equity Portfolio Management by Daehwan Kim, Ludwig B Chincarini

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CHAPTER 4Factors and Factor Choice

Not everything that can be counted counts, and not everything that counts can be counted.

—Albert Einstein

4.1 INTRODUCTION

Factors are the ingredients of quantitative equity portfolio management (QEPM) models. Just as high-quality ingredients make for excellent cuisine, carefully selected factors can, in the right combination, create models for outperformance. Factors come in many varieties: fundamental, technical, macroeconomic, and alternative. How does a portfolio manager select the right ones for a model? QEPM tenets 4 and 5 advise the manager to build quantitative models that reflect sound economic theories and persistent, stable patterns. Good factors therefore exhibit relationships with stock returns ...

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