04. Terminology

Terminology

The terminology used to describe factor models varies widely. Here are some common phrases used to refer to the components of the model.

Factor returns (the f_k s) may be:

  • macro-economic variables
  • returns on pre-specified portfolios,
  • returns on zero-investment strategies (long and short positions of equal value) giving maximum exposure to fundamental or macro-economic factors,
  • returns on benchmark portfolios representing asset classes,
  • or something else.

The b_{ij} coefficients may be called:

  • factor exposures,
  • factor sensitivities,
  • factor loadings,
  • factor betas,
  • asset exposures
  • style
  • or something else.

The s_i term may be called:

  • idiosyncratic return,
  • security-specific return,
  • non-factor return,
  • residual return,
  • selection return
  • or something else.

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