Factors drive risk premiums. One set of factors describes fundamental, economy-wide variables like growth, inflation, volatility, productivity, and demographic risk. Another set consists of tradeable investment styles like the market portfolio, value-growth investing, and momentum investing. The economic theory behind factors can be either rational, where the factors have high returns over the long run to compensate for their low returns during bad times, or behavioral, where factor risk premiums result from the behavior of agents that is not arbitraged away.
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