Portfolio-based risk factors are identified through diversified, zero-cost, long/short portfolios that may link stock returns to systematic risk. There is a substantial amount of evidence in the academic literature that some portfolio-based risk factors explain well the cross section of stock returns.
Using a size factor and value factor in addition to the market factor, in 1993, Eugene Fama and Kenneth French introduced their three-factor model, which explained stock returns better than the traditional one-factor CAPM model. This seminal asset pricing model ushered in an era that has seen many risk factors (such as momentum) introduced in the literature. But not all proposed risk factors hold up under scrutiny, nor do they all come with a clear risk/return explanation.
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