Hi, given the info below, can someone explain why the strategy incorporated in the management of the equity portfolio for Gyeongiu Electric is most likely an example of a fundamental factor model, instead of a statistical factor model?
Fundamental Factor Models have to do with factors or attributes of individual companies or securities. The Fundamental Factor Model tells you that the differences in different securities’ prices are primarily explained by the differences in the underlying factors.
The market, size, value, and momentum factors are all security-level factors, that intend to explain the differences in security prices.
On the other hand, Statistical Factor Models extract factors from a dataset of historical returns of a security or group of securities, and then the differences in securities’ prices are primarily explained through covariances between those extracted factors.
The factors that are given in this example are not statistical factors, because they were not extracted from historical data, moreso they were chosen by the analyst/manager.