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1.
Rational factor theory deals with how the market prices _______.
Risks. Factor investing is thus about finding the optimal portfolio of factor risks.
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.
Style investing is a kind of factor investing that deals with _______.
Two factors -- size (large-small) and value (value-growth).
4.
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.
5.
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.
