Factor Analysis is a statistical method used to identify underlying relationships between variables by reducing the number of observed variables into a smaller number of latent factors. It helps in understanding the structure of data, simplifying datasets, and is widely used in fields like psychology, finance, and social sciences to uncover hidden patterns and dimensions.
The Capital Asset Pricing Model (CAPM) is a financial model that describes the relationship between systematic risk and expected return for assets, particularly stocks. It is used to estimate an investment's expected return based on its beta, the risk-free rate, and the expected market return, providing a framework for assessing the trade-off between risk and return.
Multifactor models are financial tools used to explain and predict asset returns by considering multiple risk factors, beyond just the market risk. They allow investors to understand the influence of various economic, financial, and statistical factors on asset prices, helping in portfolio management and risk assessment.
The Fama-French Three-Factor Model is an asset pricing model that expands on the Capital Asset Pricing Model (CAPM) by adding two additional factors, size and value, to better explain stock returns. It suggests that smaller companies and those with high book-to-market ratios tend to outperform the market, providing a more comprehensive understanding of risk and return in financial markets.
Affine Term Structure Models are like magic formulas that help us understand how the interest rates for borrowing money change over time. They use math to predict these changes, so people can make good decisions about money and loans.