1.6.18 Factor Returns
In EDHECinfra asset pricing methodology, we decompose the excess expected return of an asset into multiple factors: size, leverage, profit, and investment. The exposures to each of those factors determine the returns that an asset can generate. By using long-short factor mimicking portfolios, we attribute the returns of infrastructure assets due to each of these factors.
Investors can use these factors for return attribution of their infrastructure portfolio, or in factor investing by selecting assets that have high/low exposures to each of these factors. The calculations of the individual factor returns are described below.
Size Factor Return (SMB)
SMB(Leverage) = 1/3 (Small Low Leverage + Small Medium Leverage + Small High Leverage) - 1/3 (Big Low Leverage + Big Medium Leverage + Big High Leverage)
SMB(Profit) = 1/3 (Small Low Profit + Small Medium Profit + Small High Profit) - 1/3 (Big Low Profit + Big Medium Profit + Big High Profit)
SMB(Investment) = 1/3 (Small Low Investment + Small Medium Investment + Small High Investment) - 1/3 (Big Low Investment + Big Medium Investment + Big High Investment)
SMB = 1/3 (SMB(Leverage) + SMB(Profitability) + SMB(Investment))
where:
Small: Total Assets ≤ Median Total Assets
Big: Total assets > Median Total Assets
Low Leverage: Leverage
Medium Leverage: Median Leverage > Leverage ≤ 80th Percentile Leverage
High Leverage: Leverage > 80th Percentile Leverage
Low Profit: Profit ≤ 20th Percentile Profit
Medium Profit: 20th Percentile Profit > Profit ≤ 80th Percentile Profit
High Profit: Profit > 20th Percentile Profit
Low Investment: Investment ≤ Median Investment
Medium Investment: Median Investment > Investment ≤ 20th Percentile Investment
High Investment: Investment > 80th Percentile Profit
Leverage Factor Return (HML(Leverage))
HML(Leverage) = 1/2 (Small High Leverage + Big High Leverage) - 1/2 (Small Low Leverage + Big Low Leverage)
where:
Small: Total Assets ≤ Median Total Assets
Big: Total assets > Median Total Assets
Low Leverage: Leverage ≤ Median Leverage
High Leverage: Leverage > Median Leverage
Investment Factor Return (HML(Investment))
HML(Investment) = 1/2 (Small High Investment + Big High Investment) - 1/2 (Small Low Investment + Big Low Investment)
where:
Small: Total Assets ≤ Median Total Assets
Big: Total assets > Median Total Assets
Low Investment: Investment ≤ Median Investment
High Investment: Investment > Median Investment
Profit Factor Return (HML(Profit))
HML(Profit) = 1/2 (Small High Profit + Big High Profit) - 1/2 (Small Low Profit + Big Low Profit)
where:
Small: Total Assets ≤ Median Total Assets
Big: Total assets > Median Total Assets
Low Profit: Profit ≤ Median Profit
High Profit: Profit > Median Profit
Market Factor Return
Market Factor Return = Average return across all companies