Multi-Factor Models

Multi-Factor Models in asset pricing are tools used to understand what influences the returns of investments, like stocks. Instead of relying on a single factor, such as market risk, these models consider multiple factors—like size, value, and industry—affecting an asset's performance. By analyzing how these factors interact and impact returns, investors can better assess risks and potential rewards, leading to more informed investment decisions. This approach recognizes that stock prices are influenced by various aspects of the economy and company characteristics, providing a more comprehensive view of investment performance.