More Factors Don’t Always Help

Professors Eugene Fama and Kenneth French have a new paper, “Incremental Variables and the Investment Opportunity Set,” that provides some important insights for investors considering funds designed to supply exposure to multiple factors, or styles, of investing.

In their study, they note: “Much asset pricing research is a search for variables that improve understanding of the cross section of expected returns. Researchers often claim success if a sort on their candidate produces a large spread in average returns. A better measure, however, is the variable’s incremental contribution to the return spread produced by a model that includes the variables already known to predict returns.”

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