Work in progress. This primer is still being written.
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It’s just Beta.

WHERE ALPHA GOES TO GET EXPLAINED.

Start with Part 01 → Browse contents ↓ About ↑
r_mkt r_p β = 0.97 α?

The premise

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

  1. 01 Why Factor Models Exist
  2. 02 The Factor Model Equation
  3. 03 Factors and Exposures
  4. 04 Types of Factor Model

Construction 05–08

  1. 05 Estimation Universe and Coverage Universe
  2. 06 Estimating Factor Returns: The Cross-Sectional Regression
  3. 07 Factor Portfolios
  4. 08 Risk Model Assembly: Factor Covariance, Specific Risk, and the Full Forecast

Applications 09–13

  1. 09 Risk Attribution: Where Does My Risk Come From?
  2. 10 Performance Attribution: Where Did My Returns Come From?
  3. 11 Portfolio Construction: How Do I Build the Portfolio I Want? soon
  4. 12 Hedging: How Do I Remove the Risk I Don't Want? soon
  5. 13 Alpha Research: What Can't the Model Explain? soon

In Practice 14–15

  1. 14 Evaluating a Factor Model: Is It Fit for Purpose? soon
  2. 15 Modifying a Factor Model: Adding, Removing, and Changing Factors soon

Appendix 16–17

  1. 16 Practical Considerations: Data, Implementation, and Pitfalls soon
  2. 17 Appendix: Reference Material soon
  3. ↳ Mini Example Source Code