Factor Investing: Concepts and Strategies By QuantInsti

Free Download Factor Investing: Concepts and Strategies By QuantInsti

Traditional investing techniques often fall short in today’s dynamic financial markets. For those seeking more effective ways to manage uncertainty and market complexity, factor-driven approaches offer a powerful alternative. In this program, you’ll study factors such as momentum, value, quality, and size—elements that can simplify decision-making, lower risks, and capture sustainable sources of alpha. You’ll also learn how to combine multiple factors to design a more resilient strategy.

SKILLS COVERED

Strategies

• Multi-factor investing
• Factor-timing techniques
• Momentum and value integration

Concepts & Trading

• Factor methodology
• Smart Beta principles
• Ranking & scoring models
• Factor blending methods

Python

• Pandas
• NumPy
• Matplotlib
• TA-Lib

LEARNING TRACK 7

This program belongs to the Learning Track: Portfolio Management and Position Sizing using Quantitative Methods

PREREQUISITES

Before starting, you should have a basic grasp of financial market concepts. Familiarity with core investment ideas such as portfolio management, asset allocation, and risk/return is expected. While knowledge of Python is not mandatory, it helps to know data structures like pandas DataFrame, visualization with matplotlib, and using loops to test strategies.

AFTER THIS COURSE YOU’LL BE ABLE TO

• Explain Smart Beta and identify the benefits of factor investing
• Evaluate core factors: value, momentum, size, and quality
• Measure and compare the impact of different factors
• Develop trading strategies based on factors
• Combine multiple factors to build diversified portfolios with stronger risk-adjusted returns
• Apply factor-timing techniques in practice

SYLLABUS

Introduction

An approach to investing that focuses on specific drivers of return across asset classes is factor investing. This section serves as a preview to the course and introduces the course contents. The interactive methods used in this course will assist you in not only understanding the concepts but also answering all questions about factor investing. This section explains the course structure as well as the various teaching tools used in the course, such as videos, quizzes, coding exercises, and the capstone projects.

• Course Introduction 5m 15s
• Course Structure 2m
• Course Structure Flowchart 2m
• Course FAQs 2m
• Quantra Features and Guidance 4m 9s

Understanding Smart Beta

After completing this section you will be able to define Alpha and Beta. You will also be able to explain the concept of Smart Beta and its advantages over traditional index investing and active investing.

• Understanding Alpha and Beta 3m 1s
• Define Alpha 5m
• Identify Alpha 5m
• Negative Alpha 5m
• Define Beta 5m
• Indication of Beta 5m
• Beta between 0 and 1 5m
• Smart Beta 2m
• Traditional Index Investing 5m
• Active Investing and Index Investing 5m
• Smart Beta and Active Investing 5m
• Describe Smart Beta 5m
• Smart Beta Advantages 5m
• Research Aspect of Smart Beta 5m
• Additional Reading on Smart Beta 2m

All About Factors

In this section, you will learn about what factors are and how they influence the price of a security. Discover how factors lead to rewards and how the factor approach helps extract these rewards. In addition to this, you will also learn about all the ways that factor investing can be the right choice for you.

• Factor Premiums 2m
• Define Factors 5m
• Reason for Factor Premium Existence 5m
• Uses of factors 5m
• Post Earnings Announcement Drift 5m
• Earnings Announcement 5m
• Factors and Asset Performance 5m
• Define Factor Premiums 5m
• Factor Based Trading 5m
• Factor Based Advantages 2m
• Basis for Factor Approach 5m
• Persistence in Factors 5m
• Factors and Trading Rules 5m
• Cost of Factor-Based Approach 5m
• Rule-Based Approach 5m
• Long-Term Persistence 5m
• Existence of Factors 5m
• Factors and Risk 5m
• Additional Reading on Factor Investing 2m

Fundamental and Price Data

Any strategy hypothesis requires data on which you can backtest and analyse the strategy performance. In this section, you will be able to retrieve the fundamental and price data of the top 100 U.S. stocks and build your stock universe which will be used later to create various factor-based strategies.

• Fetching Fundamental Data 5m
• Creating Stock Universe 5m
• Market Capitalisation 5m
• Fill the Missing Values 5m

Factor Approach

In this section, you will go through the different types of factors which have been used by different investors and traders and also look at a few popular factors.

• Brief History of Factors 2m
• Identification of Factors by Fama French 5m
• Initial Factors of Fama French Model 5m
• Discovery of New Factors 5m
• Types of Factors 2m
• Classification of GDP 5m
• Popular Style Factors 5m

What is Value?

In this section, you will understand the core of the value factor and how it can be useful in your portfolio.

• What is Value? 2m
• Factor and Low Price 5m
• Common Denominator Between New and Present Companies 5m
• Meaning of Value for Money 5m
• Perception of Value 5m
• Stock Selection 5m

Quantifying Value

You have heard of the phrase, “value for money stock”. Or “the stock is undervalued”. In this section, you will try to identify the right fundamental ratio which can be used to objectively pick an undervalued stock from a given stock universe.

• Quantifying Value 2m
• Points of Consideration While Quantifying Value 5m
• Application of Earnings Per Share 5m
• Calculation of P/E Ratio 5m
• Low Value of P/E Ratio 5m
• Importance of Financial Ratios 5m
• Importance of P/E Ratio 5m
• Comparison of Stocks Based on P/E Ratio 5m
• Financial Ratios 2m
• Calculation of Financial Ratios 5m

Identification of Undervalued Stocks

Once you have identified the right metrics to identify an undervalued stock, you will begin the process of creating a value-based strategy by first identifying the top 10 undervalued stocks from our stock universe.

• Creation of Value Strategy 2m
• Objective of Value Strategy 5m
• Identification of Undervalued Stocks Using PE Ratio 5m
• Using Two Ratios for Identification of Value 5m
• Top Undervalued Stocks 5m
• Combination of Financial Ratios 5m
• PE Ratio and Value of a Stock 5m
• PB Ratio and Value of Stock 5m
• Average Rank and Value of Stock 5m
• Stock Choice Based on Rank 5m
• Strategy Flow Diagram 2m
• Identification of Undervalued Assets Using Financial Ratios 5m
• Check Start of Month of a DataFrame 5m
• Select First Day of Month 5m
• Rank Stocks in Ascending Order 5m

Performance Analysis of Value Based Strategy

In this section, you will generate signals to go long on the top 10 undervalued stocks from our stock universe and analyse the performance of the value factor based strategy.

• Generation of Signals for Value Strategy 5m
• Rebalancing Portfolio 5m
• Performance Analysis of Value Strategy 5m
• CAGR 5m
• Sharpe Ratio 5m
• Summary 2m

Introduction to Absolute Valuation Method

In the earlier sections, you focussed on relative valuation, where you compare different stocks based on a common metric. In this section, you will focus on the intrinsic value of a stock and assess if the stock is a good buy or not.

• What is Absolute Valuation 2m
• Definition of Value 5m
• Purpose of Absolute Valuation 5m
• Valuation Method 5m
• How Does Absolute Valuation Work 2m
• Essence of Valuation 5m
• Formula of Absolute Valuation 5m
• Addition to Absolute Valuation Formula 5m
• Rate of Return and Valuation Formula 5m
• Caution of Absolute Valuation Formula 5m
• Standardisation of Growth Rate 5m
• Drawback of Absolute Valuation Formula 5m

Different Approach to Value

The value based approach has been in existence for decades. But lately, a new approach to valuation has become popular, where you try to forecast the present value of the future earnings of a stock. You will understand the intuition behind this approach in this section. Further, you will also bust some myths around value factor based investing.

• Intuition of DCF Valuation Method 2m
• Definition of Cash Flow 5m
• Steps in DCF Valuation Method 5m
• Calculation of Present Value 5m
• Terminal Value and DCF Valuation 5m
• DCF Value Per Share 5m
• Usage of Discount Rate in DCF Valuation 5m
• Difference in Value Using DCF Valuation 5m
• Limitation of DCF Valuation 5m
• Calculation of Present Value of Next Five Years 5m
• Choice of Asset Based on DCF 5m
• Six Common Myths Of Value Investing 3m 28s
• Value Investing Related Myths 5m
• Application of Value Investing Principles 5m
• Challenges of Value Investing 5m
• Additional Reading 2m

Capstone Project – I

In this section, you will use the learnings from the value based strategy to create a unique strategy on your own.

• Getting Started 2m
• Problem Statement 2m

Momentum Factor

In this section, you will learn the reasons for the existence of momentum, namely, herding effect, slow diffusion of news, the persistence of roll returns in futures, forced sales and purchases by fund houses. This will give you an insight into where to find momentum and what causes it.

• Why Momentum Exists 2m
• Primary Assumption of Momentum 5m
• Herding Effect Definition 2m
• Herding Effect Towards Amazon 2m
• Reason for PEAD Effect 2m
• Momentum in Futures 2m
• Reasons for Momentum 2m
• Effect of Client Redemptions 2m
• Index Tracker Fund Performance 2m
• Trading Momentum 5m
• Characteristics of Momentum 2m
• Main Challenge with Persistence of Trends 5m
• Avoiding Loss Due to Trend Reversal 5m
• Define a Momentum Crash 5m
• Dealing with Momentum Crashes 5m
• Strength in Momentum 5m
• Strong Momentum 5m
• Holding Period 5m
• Additional Reading on Momentum Factor 2m

Time Series Momentum

The time series momentum focuses on a security’s own past return. Learn the concepts of lookback and holding period. Backtest the time series momentum strategy and analyse the performance of this strategy.

• Types of Momentum 2m
• Identifying Winners 2m
• Winner and Loser Ratio 2m
• Time Series Momentum 2m
• Lookback and Holding Period 2m
• Trading Decision Based on Returns 2m
• Essential Points for Momentum Trading 2m
• Reason for Underperformance of Strategy 2m
• Strategy Flow Diagram: Time Series Momentum 2m
• Time Series Momentum Strategy 5m
• Calculate Returns 5m
• Generate TSMOM Signals 5m
• Strategy Flow Diagram: TSMOM with Volatility Adjusted Returns 2m
• TSMOM with Volatility Adjusted Returns 5m
• Calculate Volatility Adjusted Returns 5m
• Align Signal Index with Rebalanced Index 5m
• Additional Reading on Time Series Momentum 2m

Live Trading on Blueshift

Learn how you can take your backtested strategy live with some important steps. Learn about the code structure, the various functions used to create a strategy, and finally, paper or live trade on Blueshift.

• Section Overview 2m 19s
• Live Trading Overview 2m 40s
• Vectorised vs Event Driven 2m
• Process in Live Trading 2m
• Real-Time Data Source 2m
• Blueshift Code Structure 2m 57s
• Important API Methods 10m
• Schedule Strategy Logic 2m
• Fetch Historical Data 2m
• Place Orders 2m
• Backtest and Live Trade on Blueshift 4m 5s
• Additional Reading 10m
• Blueshift Data FAQs 10m

Live Trading Template

This section includes a live trading strategy template. You can tweak the code by changing securities or the strategy parameters. You can also analyse the strategy’s performance in more detail.

• FAQs for Live Trading on Blueshift 5m
• Paper/Live Trading TSMOM Strategy 2m

Cross Sectional Momentum

The cross sectional momentum works on the relative performance of the securities. You will learn to find the optimal lookback and holding periods and the criterion to select stocks for cross sectional momentum strategy. Finally, create a cross sectional momentum strategy on S&P500 stocks and analyse the strategy’s performance.

• Cross Sectional Momentum 2m
• Types of Momentum 2m
• Momentum in Returns 2m
• Which Lookback and Holding Period? 2m
• Factor to Filter Stocks? 2m
• Steps for Cross Sectional Momentum Strategy 2m
• Which Fund House? 2m
• Impact of High Number of Stocks 2m
• Lookback and Holding Period 2m
• Strategy Flow Diagram: CSMOM 2m
• Cross Sectional Momentum Strategy 10m
• Calculate Average Dollar Volume 5m
• Rank the Filtered Stocks5m
• Generate Buy Signals 5m
• Compute Trading Cost 5m
• Calculate Lookback Returns With Skip Days 5m
• Momentum Recap 2m

Value and Momentum

Relying on momentum in all phases of the market may not be the right call. To create a well-rounded portfolio, you can try to blend other factors like value. This section explains how blending value and momentum factors can be the right fit for each other. After completing this section, you will be able to create an equally weighted portfolio consisting of two factors, i.e. value and momentum.

• Combining Value and Momentum 2m
• Ways to Combine Value and Momentum 5m
• The Upside of Combining Value and Momentum 5m
• Filtering Stocks 5m
• Combining Value and Momentum Factor 5m
• Merging Dataframes 5m
• Create an Equally Weighted Portfolio 5m
• Additional Reading on Value and Momentum 2m
• Test on Value and Momentum Factors 16m

Size Factor

In this section, you will learn the reasons for the out-performance of small-cap companies and how to capture this outperformance.

• Size Factor: Definition and Intuition 3m 48s
• Definition of Size Factor 5m
• Outperformance of Small-Caps 5m
• Lack of Attention 5m
• Trading in Small-Cap Stocks 5m
• Emma’s Dilemma 5m
• Characteristics of Size Factor 2m
• Capturing the Size Factor 5m

Introduction to Quality Factor

The quality factor is quite popular among legendary investors like Warren Buffett, but is also the most confusing. In this section, you will unravel the basic tenets of selecting a quality stock.

• Part Overview 2m
• Prerequisite for Quality Factor 2m
• Factors Apart from Quality 5m
• Importance of Financial Statements Analysis 5m
• Financial Statements and Corporate Governance 5m
• Corporate Governance Checks 2m
• Hidden Losses 5m
• Artificial Increase in Profitability 5m
• Identification of Suspicious Activities 5m
• Need of Independent Auditors 5m
• Challenges in Identification of Fraudulent Companies 5m
• Significance of Reporting Expenses as Investments 5m

Creation of Quality Strategy

In this section, you will apply the principles of the quality factor to identify and go long on quality stocks.

• How to Identify Quality Stocks 2m
• Common Elements of Quality Stocks 5m
• Measurement of Company’s Ability to Navigate Business Cycles 5m
• Evaluation of Growth in Quality Stocks 5m
• Identifying Quality Stock Based on Growth 5m
• Combination of Metrics for Quality Factor 5m
• Difficulty of Identifying Quality Stocks 5m
• Identification of Profitability Element 5m
• Strategy Flow Diagram of Quality Strategy 2m
• Creation of Quality Strategy 5m
• Additional Readin 2m

Factor Timing

Different factors perform differently across market phases and durations. This section discusses whether you can improve the performance of your strategy by considering the timing of individual factors and taking positions accordingly. It also uncovers some of the challenges you may face while adapting to this approach.

• Factor Timing 2m
• Define Factor Timing 5m
• Factor Timing Approach 5m
• Types of Factor Timing 5m
• Timing the Entry and Exit 5m
• Strategy Flow Diagram: Factor Timing 2m
• Factor Timing with RSI 5m
• Calculate RSI 5m
• RSI Strategy 5m
• Drawbacks of Factor Timing 2m
• Challenges of Factor Timing 5m
• Incorrectly Timing Factors 5m
• Higher Trading Frequency 5m
• Complexity of Factor Timing 5m
• Multi-Factor Approach 5m
• Additional Reading on Factor Timing 2m
• FAQs on Factor Timing 2m

Identifying Relevant Factors

This section covers the need to identify relevant factors to create a multi-factor portfolio. This section also covers the methods to screen the factors such as correlation analysis, robustness checks and performance filters.

• Need to Identify Relevant Factors 2m
• Relevant Factors 5m
• Aim of Selecting Relevant Factors 5m
• Factor Screening Methods 5m 22s
• Purpose of Factor Screening 5m
• Purpose of Correlation Analysis 5m
• Purpose of Robustness Check 5m
• Factor Screening with Correlation Analysis 5m
• Screen Factors with Correlation Analysis 5m
• Threshold for Correlation Analysis 5m
• Performance Filter and Robustness Check 5m
• Screen Factors with Performance Filter 5m
• Screen Factors with Robustness Check 5m
• FAQs 2m
• Additional Reading for Identifying Relevant Factors 2m
• Section Recap 2m

Capital Allocation To Factors

In this section, you will learn to allocate capital to multiple factors. you will learn the drawbacks of using equal weightage method for capital allocation and explore ranking method for capital allocation.
How to Allocate Capital to Different Factors? 2m

• Equal-Weightage Approach 5m
• Drawback of the Equal-Weightage 5m
• Historical Metrics for Capital Allocation 5m
• Ranking Method Based on Sharpe Ratios 5m
• Capital Allocation Using the Ranking Method 5m
• Assign Ranks Based on Sharpe Ratio 5m
• Assumption of Ranking Method 5m
• Ranking Method With Single Historical Metric 5m
• Rank the Factors Based on the Sharpe Ratio 5m
• Section Recap 2m
• FAQ on Capital Allocation To Factors 2m

Ranking Method With Multiple Metrics

In this section, you will learn to calculate capital allocation for factors based on multiple historical metrics using the ranking method.

• Apply Ranking Method With Multiple Metrics 2m
• Ranking The Factors With Higher Volatility 5m
• Formula to Calculate the Capital Allocation 5m
• Ranking Factors Using the Ranking Method 5m
• Purpose of Assigning Ranks 5m
• Ranking Based on the Sharpe Ratio 5m
• Efficient Method to Calculate Capital Allocation 5m
• Purpose of Average Rank 5m
• Inverting the Ranking Logic 5m
• Capital Allocation With Ranking Method 5m
• Calculate the Historical Metrics 5m
• Rank the Cumulative Returns 5m
• Code to Rank Based on Volatility 5m
• Drawback of Ranking Method 2m
• Main Drawback of Ranking Method 5m
• Overcome the Drawback of the Ranking Method 5m
• Section Recap 2m
• FAQ on Ranking Method With Multiple Metrics 2m

Scoring Method for Capital Allocation

In this section, you will learn the scoring method for capital allocation and implementation of the same in Python. You will also learn how the scoring method overcomes the drawback of the ranking method.

• Scoring Method for Capital Allocation 2m
• Scoring Sharpe Ratio and Cumulative Returns 5m
• Range of Historical Metric in Scoring Method 5m
• Using Volatility for Capital Allocation 5m
• Min-Max Scaling Formula 5m
• Calculation of Capital Allocation for Factors 5m
• Volatility Inversion in Scoring Method 5m
• Benefits of Min-Max Scaling 5m
• Capital Allocation With Scoring Method 5m
• Scale the Factors Using the Minmax Scaler 5m
• Formula of Capital Allocation With Scoring 5m
• FAQs on Scoring Method for Capital Allocation 2m
• Additional Reading for Capital Allocation To Factors 2m
• Section Recap 2m

Compare the Capital Allocation Methods

In this section, you will learn the comparison between the capital allocation methods, ranking and scoring.

• Compare The Ranking and Scoring Methods 2m 37s
• Primary Drawback of the Ranking Method 5m
• Calculate Scores for Factors 5m
• Scaled Historical Metrics for Capital Allocation 5m
• Determine Capital Allocation by Scoring Method 5m

Backtesting The Factor Combination

In this section, you will learn to combine the factors to create a portfolio based on the screening and capital allocation techniques learned so far. In addition to this, you will also learn to rebalance the portfolio at regular intervals and study its performance.

• Strategy Flow Diagram 2m
• Backtest Multi-Factor Portfolio Part-1 5m
• List to Store the Rebalancing Days 5m
• Study the Performance in Each Rebalance Cycle 5m
• Backtest Multi-Factor Portfolio Part-2 5m
• Backtest the Multi-Factor Portfolio 5m
• Performance of the Multi-Factor Portfolio 5m
• FAQs on Backtesting The Factor Combination 2m
• Assessment Test 14m

Exploring Unknown Factors

Delve into uncharted territories by embarking on an exploration of unknown factors. Navigate through unexplored dimensions to uncover hidden insights and expand the boundaries of knowledge.

• Exploring Unknown Factors 2m
• Existence of Unknown Factors 5m
• Machine Learning Models 5m
• Sentiment Analysis 5m
• Technical Analysis 5m
• Research Papers 5m
• Personal Trading Experience 5m

Capstone Project – II

In this section, you will use the learnings from the factor combination based strategy to create a unique strategy on your own.

• Getting Started 2m
• Problem Statement 2m

Live Trading on IBridgePy

In this section, you would go through the different processes and API methods to build your own trading strategy for the live markets, and take it live as well.

• Section Overview 2m 2s
• Live Trading Overview 2m 41s
• Vectorised vs Event Driven 2m
• Process in Live Trading 2m
• Real-Time Data Source 2m
• Code Structure 2m 15s
• API Methods 10m
• Schedule Strategy Logic 2m
• Fetch Historical Data 2m
• Place Orders 2m
• IBridgePy Course Link 10m
• Additional Reading 10m
• Frequently Asked Questions 10m

Paper and Live Trading

To make sure that you can use your learning from the course in the live markets, a live trading template has been created which can be used to paper trade and analyse its performance. This template can be used as a starting point to create your very own unique trading strategy.

• Template Documentation 10m
• Template Code File 2m

Run Codes Locally on Your Machine

In this section, you will learn to install the Python environment on your local machine. You will also learn about some common problems while installing python and how to troubleshoot them.

• Python Installation Overview 1m 59s
• Flow Diagram 10m
• Install Anaconda on Windows 10m
• Install Anaconda on Mac 10m
• Know your Current Environment 2m
• Troubleshooting Anaconda Installation Problems 10m
• Creating a Python Environment 10m
• Changing Environments 2m
• Quantra Environment 2m
• Troubleshooting Tips for Setting Up Environment 10m
• How to Run Files in Downloadable Section? 10m
• Troubleshooting for Running Files in Downloadable Section 10m

Summary
In this section, we will summarise all the concepts taught in the course. This section also consists of all the data and code files used in the course.

• Course Summary 2m
• Summary and Next Steps 2m
• Python Codes and Data 2m

ABOUT AUTHOR

QuantInsti®
QuantInsti is recognized as a global leader in quantitative and algorithmic trading education and research, with participants from over 190 countries. Founded by the creators of iRage, one of India’s most prominent HFT companies, QuantInsti has been empowering learners for more than a decade through a unique ecosystem of training, research, and financial technology applications.WHY QUANTRA®?

• Learn efficiently in less time
• Be guided by industry practitioners
• Flexible self-paced structure
• Access to data & pre-built strategy models for practice

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