Almost any parameter associated with the fundamental or market data of a company can be used as a factor. With potentially hundreds of factors available it is necessary to choose the most effective ones and avoid those that may be construed as random noises or one-time anomalies. Empirical developments in this space demonstrate that commonly accepted investment factors explain security returns cross-sectionally, over time, and across markets.

Common Attributes of Investment Factors

Any determinant of investment returns and/or risk must adhere to 5 unique attributes in order to be formally classified as an investment factor (Berkin & Swedroe, 2016). Investment factors must be,

• Persistent - The parameter must consistently explain returns over time i.e. its explanatory power must not fade away over time.

• Pervasive - The parameter must explain returns across markets, economies, sectors, and geographies.

• Robust - The parameter must not change its meaning or impact significantly with changes in the definition of its characteristics. For example, whether defined as the trailing price-to-earnings, price-to-book, or dividend yield, the meaning and economic significance of the Value factor must remain truly unambiguous.

• Investable - Gaining exposure to the specific parameter must be easy and cost-efficient.

• Intuitive - There must be an economic rationale/justification for getting exposure to that specific parameter.