Factor Models

Factor models are tools used to analyze and predict financial returns by identifying key underlying factors that influence asset prices. Instead of examining each investment individually, these models assume that returns are driven by common factors, such as economic growth, interest rates, or inflation, as well as individual asset characteristics. By understanding these factors, investors can better explain why assets perform the way they do and make informed decisions about diversification and risk management. Essentially, factor models help simplify complex markets by highlighting the main influences on investment performance.