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1.
What is one consequence of factor-based investing?
The hurdle for being declared a truly skilled manager has risen over time. Today, studies looking for evidence of skill in equity mutual funds control for exposure to size, value, and momentum factors. In other words, if a manager's excess returns come during times that value, smaller-cap, or momentum stocks outperform, the procedure will adjust the "excess" return to zero.
2.
What is a factor?
An attribute of an asset that both explains and produces excess return. An attribute of an asset that both explains and produces excess return.
3.
Once researchers identify an investment strategy that replicates alpha, what will happen to that alpha?
It will become beta. What was once considered alpha will become beta (or perhaps some other factor) once it is replicated by a known strategy.
4.
When doing research on investing behavior, controlling for exposure to size, value, and momentum will reduce the effect of alpha.
True. Since alpha is considered the excess return attributable to a manager's skill, controlling for it will reduce the role of that skill. Over the past few decades, that has raised the bar for being a truly skilled manager.
5.
Research has found that the stronger the factor attribute (such as momentum, quality, etc.), _______.
The higher the excess return. The stronger the factor attribute, the higher the excess return.
