How can we extract information from market prices?

Market prices, combined with fundamental company data like balance sheets and income statements, contain valuable information about expected returns.

In a multifactor framework, we examine cross-sectional differences in company characteristics. Securities with similar risk profiles should offer similar expected returns—so when we observe persistent return differences associated with factors like value, profitability, or investment, we are most likely identifying risk premiums.

We use quantitative methods to systematically tilt toward characteristics historically associated with higher average returns. Relative valuations and firm fundamentals guide which securities to overweight in portfolio construction.