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Size

The size factor represents the relationship between the size of a company and its future performance. Through their academic research, Fama & French (1992) found that in the long term, a portfolio of smaller size companies is consistently outperforming a portfolio of larger size ones. We can identify small size stocks by their market capitalization.

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Value

The value factor represents the relationship between the company’s relative valuation, and it’s future performance. Through their academic research, Fama & French (1992) found that in the long term, a portfolio of relatively cheap companies is consistently outperforming a portfolio of relatively expensive ones. We can identify the cheapness of a company by a lower price to book ratio.

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Momentum

The momentum factor represents the relationship between the stock's past and future performances. Through their academic research, Jagadeesh & Titman (1993) found that in the long term, a portfolio of previous winners is consistently outperforming a portfolio of past losers. We can identify winners by calculating their past 12 month's performance and omitting the last month.

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Volatility

The volatility factor represents the relationship between the stock’s volatility and, it’s future performance. Through their academic research, Haugen & Heins (1972) found that in the long term, a portfolio of low volatility stocks is better in terms of risk adjusted-return than a portfolio of high volatility ones. We can identify low volatile stocks by their 1-year volatility.

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Profitability

The profitability factor represents the relationship between the company’s profitability, and it’s future performance. Through his academic research, Robert Novy-Marx (2013) found that in the long term, a portfolio of companies with higher profitability is consistently outperforming a portfolio of companies with lower profitability. We can identify highly profitable companies by their gross profit to assets ratio.

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Investment

The investment factor represents the relationship between the company’s assets growth, and it’s future performance. Through their academic research, Sheridan & Wei (2004) found that in the long term, a portfolio of companies with lower asset growth is consistently outperforming a portfolio of companies with higher assets growth. We can identify lower investment companies by their 1-year asset growth.

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Quality

The quality factor is an extension of the profitability factor. It represents the relationship between the company’s quality, and it’s future performance. Through their academic research, Hsu, Kalesnik and Kose (2019) found that in the long term, a portfolio of companies with higher quality is consistently outperforming a portfolio of companies with lower quality. Even though there is no consensus of how quality should be defined by academic researchers, the authors found that profitability ratios, accounting ratios, payout ratios and investment ratios are robust and significant in the long term. We define the quality factor by stocks with high return on equity, high payout ratio and low asset growth.

Select and combine different inputs to build your unique investment strategy.

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Analysis
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