A five factor model of investment risk ...
The research shows that financial risk can be thought of in terms of five factors or dimensions:
Three Stock Factors
1. Market: Stocks have higher expected returns than fixed income
2. Size: Small company stocks have higher expected returns than large company stocks
3. Price: Lower-priced “value” stocks have higher expected returns than higher-priced “growth” stocks
Two Fixed Income Factors
1. Maturity: Longer-term instruments are riskier than shorter-term instruments
2. Default: Instruments of lower credit quality are riskier than instruments of higher credit quality
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