Quantitative investing

Risk factor

In factor investing, the term 'factor premium' can be replaced with 'risk factor' or 'risk premium', on the supposition that a factor premium represents compensation for higher risk.

However, the question remains as to whether the premiums actually represent compensation for higher risk or whether other aspects also play a role. If the first is true, the term risk factor is appropriate. This is in line with the belief in an efficient market, where returns and risk go hand in hand.

Invisible layers surface to deliver attractive returns

However, Robeco prefers the term 'factor premium', as it is not always necessary to take more risk to earn such premiums. The most familiar example is the low-volatility factor (low vol). While investors actually take less risk using this factor, the returns they can expect match the market.