Momentum
Recent winners continuing to outperform, and recent losers to lag, over the following months. A persistent anomaly, explained either as underreaction and herding or as a risk not yet identified.
Where you will meet it
Momentum appears in 17 learning outcomes on the CFA syllabus. A few of them:
- Explain multi-factor models and arbitrage pricing theory as used for equities
“Fundamental models use company characteristics such as size, value and momentum; statistical models extract factors from return data.”
- Explain where the capital asset pricing model falls short
“Empirically, size, value and momentum have explained returns beyond beta, which motivated the multifactor models that followed.”
- Explain momentum indicators and how they are used in valuation
“Momentum indicators relate a price or a fundamental to its own history or to expectations, on the premise that trends persist.”
- Explain and contrast the three kinds of factor model: macroeconomic, fundamental, and statistical
“Fundamental factor models use company attributes such as value, size, momentum or industry: sensitivities are standardised attribute values, and factor returns are estimated each period by cross-sectional regression.”
See also
Practise it
Practise momentum until it is automatic: questions that explain every wrong option.
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