Factor exposure analysis

May 14, 2020

Factor exposure analysis is a quantitative method that gives investors the ability to measure and understand the return drivers of investment strategies.

In general, this type of analysis is grounded in the notion that investment returns are generated through the exposure to different sources of risk premia, or factors. While some risk premia, such as the equity market risk premium, are well known by institutional investors, there are a wide variety of factors that can drive the performance of portfolios over both the short-term and long-term. Additionally, a robust factor exposure analysis allows investors to better judge if active strategies have delivered any “alpha” in excess of their factor exposures.