Evaluate Factor Risk and Performance with Alphalens Reloaded

Factor investing is a strategic approach where assets are chosen based on attributes or factors that are associated with higher returns. This method differs from traditional investment strategies which focus on asset classes like stocks, bonds, or sectors. Factor investing emphasizes the underlying drivers of risk and return in securities. The crux of factor investing lies in the systematic identification and harnessing of these and other factors. By understanding the sources of risk and return, we can aim for returns above traditional benchmarks. It’s essential to note, however, that while factor investing can enhance portfolio diversification and potential returns, it does not eliminate risk. Market conditions, economic changes, and other externalities can influence the effectiveness of factor-based strategies at any given time.

In Chapter 5, Build Alpha Factors for Stock Portfolios, we explored recipes to construct...