# Factor model

Also found in: Encyclopedia.

## Factor model

A way of decomposing the forces that influence a security's rate of return into common and firm-specific influences.

## Factor Model

A mathematical calculation of the extent to which macroeconomic factors affect the securities in a portfolio. Factor models attempt to account for contingencies like changes in interest rates or inflation. Factor models fall into three main categories. A statistical factor model attempts to explain risks particular to an investment. A fundamental factor model looks at risks to an industry or market that may affect a portfolio. Finally, a macroeconomic factor model considers relevant risks to the wider economy. See also: Risk analysis.

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