Most investors classify investment factors into two broad categories, namely macroeconomic and style factors. As its name suggests, macroeconomic factors illustrate broad macroeconomic and financial elements of risk across several asset classes such as equities, fixed income, and gold. Common macroeconomic factors include interest rates, real GDP/economic growth, inflation, money supply and liquidity. Macroeconomic factors are typically used to determine asset allocation between different asset classes.

On the other hand, style factors are those specific to an asset class and used to select securities within the asset class. The most prevalent style factors for equities include:

• Size (small-cap, mid-cap, or large-cap companies)
• Value (undervalued stocks based on financial ratios)
• Momentum (stocks with strong recent performance trends)
• Low Volatility (low-risk stocks with stable returns)
• Quality (companies with strong financials like profitability, low debt, and high earnings stability).

We explore these in detail in the coming sections.