Specific benefits
factor.formula
Specific profit factor calculation formula:
Fama-French three-factor model regression:
in:
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The return of stock i at time t, usually expressed in logarithmic terms.
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The intercept term for stock i represents the average excess return of the stock that cannot be explained by the three-factor model.
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The market risk premium factor at time t is usually the market portfolio return minus the risk-free rate.
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The size risk factor at time t represents the difference between the returns of small-cap stocks and large-cap stocks.
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The value risk factor at time t represents the difference between the returns of stocks with high book-to-market ratios and those of stocks with low book-to-market ratios.
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The residual term of stock i at time t represents the idiosyncratic risk in the stock’s return that cannot be explained by the three-factor model.
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The goodness of fit of the regression model, ranging from 0 to 1, indicates the explanatory power of the Fama-French three-factor model for stock returns.
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The sensitivity of a stock i to a market risk factor.
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The sensitivity of stock i to the size risk factor.
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The sensitivity of stock i to the value risk factor.
factor.explanation
The specific return factor reflects the part of individual stock returns that cannot be explained by the three common style factors of market, size and value. This part is usually considered to be returns related to company fundamentals or investor sentiment. The higher the factor value, the stronger the specificity of the stock return, the lower the correlation with the overall market style, and the more likely it is to be affected by the individual stock's own factors. This factor is generally considered to measure the speculative nature of stock prices: stocks with high specific returns may have excessive speculation in the past period of time, and price fluctuations may reflect more irrational factors, such as market sentiment, information asymmetry, etc. In quantitative trading strategies, this factor can be used to screen stocks with specific returns, or to build an investment portfolio that can hedge market risks.