Learn value, momentum, quality factors — Hinglish notes

6.6.2 · Stock-Market › Factor & Behavioral Finance

WHY factors exist karte hain bilkul?

WHY yeh matters karta hai: Market return ( $R_{m}$ ) ek factor hai (market beta). Lekin regressions dikhate hain ki ek portfolio ka zyada return doosre tilts se aata hai. Agar tum ek repeatable tilt identify kar sako, toh tum ek strategy build kar sakte ho — aur tumhe pata hoga ki tumhe actually kisliye pay kiya ja raha hai.

Iske peeche ka core model ek multi-factor regression hai:

$R_{i} - R_{f} = α_{i} + β_{m} (R_{m} - R_{f}) + β_{v} VAL + β_{m o} MOM + β_{q} QUA + ε_{i}$

$R_{i} - R_{f}$ = stock ka excess return risk-free rate ke upar.
Har $VAL/MOM/QUA$ ek long–short factor portfolio ka return hai.
$β$ = stock us factor par kitna load karta hai.
$α$ = bacha hua skill/luck jo factors explain nahi kar paate.

HOW ek factor portfolio build hota hai (universal recipe):

Har stock ko characteristic ke hisaab se score karo (jaise sasta hona).
Stocks ko buckets mein sort karo (deciles/quintiles).
Top bucket ko long karo, bottom bucket ko short karo.
Long–short return = factor premium.

Figure — Learn value, momentum, quality factors

1. VALUE — "cheap kharido"

WHY yeh pay karta hai? Do steel-manned stories:

Risk story: cheap firms aksar distressed/fragile hoti hain, toh tum us risk ko bear karne ke liye compensated ho.
Behaviour story: investors bad news ko over-extrapolate karte hain, prices zyada neeche push ho jaati hain; woh mean-revert karti hain.

HOW ek value score compute karte hain — ek common measure earnings yield $E / P$ hai (P/E ratio ka inverse):

$Value score = \frac{E}{P} = \frac{Earnings per share}{Price per share}$

Why P/E ko invert karte hain? Taaki zyada score = zyada attractive, sort ki direction se match kare (top decile = sabse cheap).

2. MOMENTUM — "recent winners kharido"

WHY "12–1" window? Standard signal 12 mahine pehle se 1 mahine pehle tak ka return hai:

$MOM signal = \frac{P _{t - 1}}{P _{t - 12}} - 1$

Why last month skip karte hain? Bohot short-term (1-month) returns reverse hote hain (bid–ask bounce, liquidity). Isko include karna "trend" signal ko noise se contaminate kar deta. Isko skip karna clean trend rakhta hai.

WHY momentum pay karta hai? Behaviour: investors pehle news par under-react karte hain (prices dheere upar drift karti hain), phir eventually over-react karte hain (bubble → crash). Momentum is drift ko harvest karta hai.

3. QUALITY — "healthy businesses kharido"

WHY yeh pay karta hai? Behaviour: investors durable profitability ke liye underpay karte hain, exciting story-stocks ke peeche bhaagkar. Risk: high-quality firms safer hoti hain, toh ek pure-risk model lower return predict karta — phir bhi historically unhone zyada kamaya hai, yeh ek anomaly hai.

HOW — gross profitability (Novy-Marx):

$GP/A = \frac{Revenue - COGS}{Total assets}$

Why gross profit, net income nahi? Gross profit "cleaner" hota hai — accounting choices, taxes, one-off charges se kam distorted hota hai, isliye future profitability better predict karta hai.

Factors combine karna (80/20 core)

Do factors ke 50/50 blend ke liye returns $R_{1}, R_{2}$ ke saath:

$Var (R_{p}) = \frac{1}{4} σ_{1}^{2} + \frac{1}{4} σ_{2}^{2} + 2 \cdot \frac{1}{2} \cdot \frac{1}{2} ρ σ_{1} σ_{2}$

Why yeh help karta hai: agar $ρ < 0$ (value vs momentum), toh last term negative hai, isliye combined risk dono ke average se neeche aa jaata hai — same expected return, kam volatility → higher Sharpe.

Flashcards

Finance mein "factor" kya hota hai?

Ek systematic, persistent characteristic jo bahut saare stocks mein common ho aur market ke upar unke returns drive kare; iska premium exposure ke har unit par extra return hai.

Factor portfolio build karne ki universal recipe?

Sabhi stocks ko characteristic ke hisaab se score karo, buckets mein sort karo, top bucket long karo aur bottom short karo; long–short return factor premium hai.

Bottom decile ko top se subtract kyun karte hain?

Overall market move cancel karne ke liye aur characteristic ke pure effect ko isolate karne ke liye.

Value ka classic academic measure?

Book-to-market

B / M

(ya equivalently earnings yield

E / P

); high = cheap = value.

Scoring ke liye P/E ko E/P mein invert kyun karte hain?

Taaki zyada score matlab zyada attractive ho, top-decile long leg ki direction se match kare.

Momentum ka "12–1" signal kya hai?

12 mahine pehle se 1 mahine pehle tak ka return:

P_{t - 1} / P_{t - 12} - 1

Momentum mein most recent month skip kyun karte hain?

Short-term (1-month) returns reverse hote hain (liquidity/bid-ask noise); skip karna clean trend signal rakhta hai.

Momentum ke liye behavioural story?

News par under-reaction se prices dheere drift karti hain; momentum is drift ko capture karta hai.

Value ke liye behavioural story?

Bad news ka over-extrapolation cheap stocks ko zyada neeche push karta hai; woh mean-revert karti hain.

Novy-Marx quality measure aur gross profit kyun?

Gross profitability GP/A = (Revenue − COGS)/Total assets; gross profit net income se accounting se kam distorted hota hai.

Value + momentum + quality combine kyun karte hain?

Inke returns low/negatively correlated hain, isliye blending diversify karta hai aur Sharpe ratio badhata hai bina expected return sacrifice kiye.

Factor regression mein alpha kya represent karta hai?

Woh return jo identified factors explain nahi kar paate — bacha hua skill ya luck.

Recall Feynman: ek 12-saal ke bacche ko explain karo

Socho ek badi shelf par khilone (stocks) hain. Ek ek khareedne ki jagah, smart rules use karo. Value: woh khilone kharido jo unki value se kam price par sale pe hain. Momentum: woh khilone kharido jo sabne recently grab karna shuru kar diya hai, kyunki yeh rush thodi der aur chalta hai. Quality: woh khilone kharido jo ache se bane hain aur toote nahi. Aur yeh neat trick hai: teeno rules saath use karo, kyunki jis din "sale wala" rule lose kare, "sabke grab karne wala" rule aksar win karta hai — isliye tumhari toy chest kabhi ek saath crash nahi hoti.

Connections

Fama-French Three & Five Factor Models
CAPM and Market Beta
Behavioral Finance - Over- and Under-reaction
Portfolio Variance and Diversification
Sharpe Ratio
Long-Short Equity Strategies