When the interest rate increases from the central bank’s end, borrowing of loans becomes costlier. Real rates or interest rate movements are also one of the crucial factors for making investment decisions. With a positive economic growth, Gross Domestic Product (GDP) rises and hence, more investments take place in the financial markets.įor instance, when COVID-19 broke out in 2020, the economy went down considerably pulling the stock market down. Further, some simple examples of macroeconomic factors are: Examples of macroeconomic factorsĮconomic growth is an extremely good factor for stock returns and economic growth forecasts lead to an optimum allocation of investment decisions. These are the ones that capture broad risks across asset classes for the returns. The two types of factors or characteristics of a portfolio are: Macroeconomic factors or characteristics Here is the image to portray the same: Factor investing evolved gradually While creating a factor based investment strategy, tweaking of the portfolio (including or removing factors) takes place in such a way that the factors of the portfolio assets generate favourable long term investment returns.įactor investing has evolved over a period of time from being only market and company-specific to various factors. Such factors include volatility, momentum, size of the stock etc. How does factor investing differ from smart beta?įactor investing implies the investment approach that makes use of “factors”, or the particular “characteristics” that make the various stock returns differ from each other.Further in this article, we will find out about factor investing in detail. Hence, every individual trader will look to invest in stocks with similar factors for risks and returns in accordance with the trader’s affordability of risk for every generated return. Factors are integral for learning about risks and returns for a particular investment approach. On the basis of nutrients, you decide which food to consume, and how much. Factors to investment decisions is what nutrients are to food.
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