In recent years, factor investing has become an important category in the investment field. Asset Management: A Systematic Approach to Factor Investing, written by the industry expert Andrew Ang, is considered the bible for learning about factor investing. This book comprehensively summarizes the concepts, methods and application practices of factor investing. It has guiding significance for investors to carry out factor investing.
The book explains the conceptual model of factor investing
Ang’s book is based on the asset pricing theory to construct a conceptual model for factor investing. The core formula is: expected excess return = alpha + factor exposure x factor risk premium. It means the excess return of an asset comes from two parts: the abnormal return alpha, and the exposures to various factors multiplied by factor risk premiums. This formula lays the theoretical foundation for the later practice of factor investing.
The book introduces mainstream multifactor models
On top of the conceptual model, Ang’s book reviews some mainstream multifactor models, including the CAPM, APT, Fama-French 3 factor model, and the q-factor model. These models identify important factors like market risk, size, value, profitability, investment, etc. The exposures to these factors determine expected returns of assets.
The book distinguishes smart beta and alpha seeking
Based on the sources of excess returns, Ang divides factor investing strategies into smart beta investing and alpha seeking. Smart beta aims to capture factor risk premiums in a transparent and systematic manner. While alpha seeking tries to exploit mispricing and generates abnormal returns. This distinction helps investors to be clear about their objectives.
The book covers implementations of factor investing
Ang’s book also introduces the implementations of factor investing, including portfolio construction, risk management, and product selections. For example, how to combine different factors in a portfolio, how to manage risks associated with factors, and how to use ETFs to gain factor exposures. These contents make the book a comprehensive guide for practicing factor investing.
In summary, Andrew Ang’s book Asset Management: A Systematic Approach to Factor Investing offers an authoritative and comprehensive overview of factor investing. From theories to applications, it is an essential reference for investors who want to learn and practice factor investing strategies.