Michael Brenndoerfer | Data & AI, Private Equity, Technology

Michael Brenndoerfer

Arbitrage Pricing Theory and Multi-Factor Models › Key Parameters

Michael BrenndoerferDecember 15, 20251 min read

Quantitative FinanceAll chapters

Part 9 of 15Portfolio Theory and Investment Analysis

Chapter 48Arbitrage Pricing Theory and Multi-Factor Models › Key Parameters

Reading section 12 of 15 · Key Parameters · 1 minSection 12 of 15 · 1 min

Section 12 of 15 · 1 min read

Arbitrage Pricing Theory and Multi-Factor Models › Key ParametersOne section · Sections in this chapter12 / 15 ↓

Sections in this chapter15

Reading tools Definitions & inline links

Choose your expertise level to adjust how many terms are explained. Beginners see more tooltips, experts see fewer to maintain reading flow. Hover over underlined terms for instant definitions.

Article links

Make inline references clickable

The key parameters for the Multi-Factor Models discussed in this chapter are:

MKT: Market factor return ( $R_m - r_f$ ). A proxy for broad equity market risk.
SMB: Size factor return (Small Minus Big). The return difference between small-cap and large-cap stocks.
HML: Value factor return (High Minus Low). The return difference between value (high B/M) and growth (low B/M) stocks.
MOM: Momentum factor return (Up Minus Down). The return difference between recent winners and losers.
$\beta_i^j$ : Factor loading. The sensitivity of asset $i$ to factor $j$ , estimated via time-series regression.
$\lambda_j$ : Factor risk premium. The expected excess return earned per unit of exposure to factor $j$ .
$\alpha_i$ : Alpha. The abnormal return of asset $i$ not explained by the factor exposures.