<commit_before>= Hedging Factors

== Review

The CAPM suggests that a firm's expected excess return (Ri) above the risk-free rate (Rf) is simply a scaled version of the market portfolio (Rm) expected excess return. In other words:  ( Ri - Rf ) = scaling factor * ( Rm - Rf ). Put differently,

( Ri - Rf ) = alpha + beta * ( Rm - Rf ).

<NAME> and <NAME> argued convincingly that there are additional risk factors that can better describe the expected excess return, namely a size premium (SMB) and a value premium (HML). 

image::magellan_fivefactors.PNG[]<commit_msg>Update 2016-09-27-Hedging-Factors.adoc<commit_after>= Hedging Factors

== Review

The CAPM suggests that a firm's expected excess return (Ri) above the risk-free rate (Rf) is simply a scaled version of the market portfolio (Rm) expected excess return. In other words:  ( Ri - Rf ) = scaling factor * ( Rm - Rf ). Put differently,

( Ri - Rf ) = alpha + beta * ( Rm - Rf ).

<NAME> and <NAME> argued convincingly that there are additional risk factors that can better describe the expected excess return, namely a size premium (SMB) and a value premium (HML). Recent research has shown that the expected return can further be improved with additional factors. Cliff Asness eloquently <a href="https://www.aqr.com/cliffs-perspective/our-model-goes-to-six-and-saves-value-from-redundancy-along-the-way">describes them</a> here:

image::magellan_fivefactors.PNG[]
{'fraction_non_alphanumeric': 0.09593837535014006, 'fraction_numerical': 0.0056022408963585435, 'mean_word_length': 4.196363636363636, 'pattern_counts': {'":': 0, '<': 9, '<?xml version=': 0, '>': 9, 'https://': 1, 'lorem ipsum': 0, 'www.': 1, 'xml': 0}, 'pii_count': 0, 'substrings_counts': 0, 'word_list_counts': {'cursed_substrings.json': 0, 'profanity_word_list.json': 0, 'sexual_word_list.json': 0, 'zh_pornsignals.json': 0}}
{'dir': 'git-commits-cleaned', 'id': '4764650', 'n_tokens_mistral': 447, 'n_tokens_neox': 417, 'n_words': 180}