F] = the mean value of the "long/short" returns to

factor portfolio F

After adjusting the

factor portfolio weights for liquidity, the superiority of low-priced stocks completely evaporated.

By gaining exposure to these six strategies, CS claims that the FX

Factor Portfolio can outperform more narrowly-based foreign exchange indices.

In the Fama-French factor-based asset pricing model, expected stock returns are contingent on the stock's sensitivity to three priced factors: the excess return of the market portfolio over the risk-free rate, the return of the size (SMB)

factor portfolio, and the return of the book-to-market (HML)

factor portfolio.

Try this thought experiment: Imagine you bought into a

factor portfolio with a small cap/value tilt in 1997.

I came to the realization that even the most sophisticated of these users have a hard time wrapping their head around factors, and how you build

factor portfolios, and what happens if you have more of this factor or that factor?

Gerard Hoberg, University of Maryland, and Ivo Welch, Brown University and NBER, "Better

Factor Portfolios and Pricing Book-to-Market Characteristics with the Fama-French Factor Model"

The main fishing constraint one can imagine is that the

factor portfolios are in fact mimicking portfolios for some well-understood macroeconomic risk.

In order to evaluate whether, say, fund managers have stock-picking skill, it does not matter whether the

factor portfolios correspond to real risks or not, and whether the average returns of the

factor portfolios continue out of sample.