Risk Factors Models

Dany Cajas
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Dany Cajas: Orenji EIRL

Chapter Chapter 4 in Advanced Portfolio Optimization, 2025, pp 57-71 from Springer

Abstract: Abstract This chapter explains how to build risk factors models like the Capital Asset Pricing Model or the Arbitrage Price Theory. These models try to explain the performance of the asset returns as a function of the performance of risk factors. Then, based on these models, we can estimate the expected returns vector and covariance matrix of asset returns as a function of risk factors that can be explicit (exogenous variables) or implicit (principal components of exogenous variables). These new estimators tend to produce more diversified and robust portfolios than if we only use the sample-based estimates of the parameters as inputs of portfolio optimization models.

Date: 2025
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DOI: 10.1007/978-3-031-84304-4_4

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