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Factor Investment Efficiency Analysis

Student: Artyom Ilyin

Supervisor: Elena A. Ponomareva

Faculty: Faculty of Economics

Educational Programme: Economics (Bachelor)

Final Grade: 9

Year of Graduation: 2020

Factor investing — an investment approach focused on specific characteristics of stocks, such as value or volatility, has become a mainstay of investment portfolios in recent decades. Many factor investing strategies are popular for obvious reasons: they are transparent, provide access to widely accepted sources of expected profit, have low management costs and, if designed correctly, reasonable transaction costs. Of course, not all products in this category provide all of these features. However, when these features are present in the strategy, it can have a significant positive impact on the return on investment. Factor investing has received considerable attention recently, primarily because factors are the cornerstones of "Smart Beta" strategies that have become popular among individual and institutional investors. In fact, over the past five years, the net inflow to these strategies has amounted to almost $ 250 billion. However, in fact, investors have been using factor methods in one form or another for several decades, seeking to obtain potential increased returns adjusted for risk from certain factor premiums. In this paper, we will define factor investing and look at its history, consider six common factors and the theory behind them and show their effectiveness, and discuss the potential benefits of investing in factor strategies. The growing popularity of factor investing in the world raises an urgent question about how effective it is in the Russian market and its specific limitations in the form of a small number of public companies. The purpose of our research is to provide a broad overview of factor investing and analyze the applicability of factor strategies in the Russian market. Our work consists of three chapters, the first of which contains the definition of factor investing, the study of stories and basic principles. The second Chapter consists of an analysis of empirical research on the effectiveness and applicability of factor strategies, as well as the risks and advantages of this approach in investing. In the third Chapter of our work, we conduct our own research, the main novelty of which is the analysis of factor investment in the Russian market. We will conduct a full-fledged analysis, including the collection of necessary data, regression and static analysis, as well as analysis of factor strategies based on historical data.

Full text (added May 19, 2020)

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