Explain what investors can gain by modelling asset returns across several dimensions of risk rather than one
The idea
Looking at several risk dimensions rather than a single market beta shows investors what they are really exposed to. Two portfolios with the same beta can respond very differently to a recession, an inflation shock or a credit crisis. Many investors have income or liabilities that already carry some of these risks: an owner of a cyclical business, or a pension fund with inflation-linked liabilities, may want less of the same exposure in the portfolio and accept a lower expected return to get it. Multifactor analysis lets them hedge unwanted exposures and harvest others deliberately. The trap is assuming the market portfolio is the best risky portfolio for every investor regardless of their other exposures.
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