are the factors just variables or the change in variables. for example i thought the factors were things like P/E ratio but secret sauce page 186 says that theyre “unexpected changes in microeconomic factors.” i think the “unexpected” part is wrong, since it is the macroeconoimc models that incorporate the surprises.

i think the P/E ratios would be fundamental models. In macro models you are being rewarded (penalized) for the unexpected surprises.

right so a factor in the fundamental model would be something like P/E right? not the change in P/E or the surprise in P/E

yes but its standardized: [(p/e) - mean p/e] / SD p/e

its the beta (sensitivity) that is standardized, not the factor

Here’s how I remember the differences between macro and fundamental factor: The slope coefficients are estimated and the factors are calculated in macro models. The reverse is true for fundamental: the slope coefficents are calculated and the factors are estimated rates of return. Just think opposites. As for the intercept, just bloody remember that the macro intercept is the expected return from APT, and the fundamental factor intercept is the intercept for the market wide average because if the slope coefficients are calculated say (Actual P/E - Average P/E)/Std Dev P/E, then for the slope coefficients to be zero, the (actual value - average/std dev).