Fundamental Factors: Machine learning in factor investing

All factor investment strategies bring a promise of a desired outcome, such as performance above a benchmark, higher dividends, or lower volatility through the business cycle. One example of a factor portfolio is the popular low volatility or SmartBeta product, which promises to create a portfolio that will exhibit lower price volatility by picking stocks that will, on average, share the low volatility characteristic.

Forecasting future stock-price volatility can require forecasting future business success or failure using fundamental data, and some modelling skill. An example of the difficulties in forecasting future business success is illustrated by the performance of Next PLC, a UK-based retail company whose price volatility rose significantly over 2016 and 2017 as it faced sudden inflationary pressures as a result of sterling’s weakness following the EU referendum, and sectoral shifts away from clothing expenditure...

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Download Fundamental Factors part 1: An introduction 

Download Fundamental Factors part 2: Around the world in four factors