What Is a Linear Factor?

By Staff WriterLast Updated Mar 29, 2020 11:28:31 PM ET

A linear factor is the return on an asset in relation to a limited number of factors. A linear factor is mostly written in the form of a linear equation for simplicity.

The most common reasons that a linear factor is written in the form of a linear equation are stocks, bonds and mutual funds. These reasons need a linear function because they are constantly changing, but they have a constant amount as well. The linear equation allows a person to figure out the amount that each of them are by inputting the original amount, the interest and the return on the mutual fund, stock or bond.

People can figure out a variety of linear equations by knowing how their return relates to their original asset. They should have a clear idea of how the interest and growth works on the original and should understand that there is normally a correlation between the two. The linear factor has no limitations on the number of correlations that can be found with the enumerated factors. It is important for people doing a linear equation that the numbers that are the most important be focused on first. The return and the asset should always be the first numbers that are figured out and the rest of the numbers are static and should be treated secondarily.