Carhart four-factor model
The Carhart four-factor model is a way of measuring investment performance. It looks at four different aspects of investment performance that are used to measure how successful an investment has been.
The first factor is a measure of the returns of an investment compared to the returns of a certain stock market index. For example, if the stock market index was up by 8% over a certain time period and an investment performed 10%, then the first factor would measure how much better the investment did than the index.
The second factor looks at how much risk was taken in order to generate the returns of an investment. If a portfolio had very high risk and performed well, then that performance would likely be reflected in this factor.
The third factor looks at how the returns of an investment change over time. This can tell us if the investment was steady or if there were times when it did poorly.
The fourth factor looks at how pricing of securities (stocks and bonds) affects the returns of the investment. If a certain stock or bond was priced more expensively than normal, then that could affect the performance of the investment.
Overall, the Carhart four-factor model is a way of measuring the performance of investments over time, by looking at how the returns do in comparison to a stock market index, how risky the investments were, how steady the returns were over time, and how pricing of securities affects the performance.
The first factor is a measure of the returns of an investment compared to the returns of a certain stock market index. For example, if the stock market index was up by 8% over a certain time period and an investment performed 10%, then the first factor would measure how much better the investment did than the index.
The second factor looks at how much risk was taken in order to generate the returns of an investment. If a portfolio had very high risk and performed well, then that performance would likely be reflected in this factor.
The third factor looks at how the returns of an investment change over time. This can tell us if the investment was steady or if there were times when it did poorly.
The fourth factor looks at how pricing of securities (stocks and bonds) affects the returns of the investment. If a certain stock or bond was priced more expensively than normal, then that could affect the performance of the investment.
Overall, the Carhart four-factor model is a way of measuring the performance of investments over time, by looking at how the returns do in comparison to a stock market index, how risky the investments were, how steady the returns were over time, and how pricing of securities affects the performance.
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