Factor investing is becoming popular these days. It has its roots in Arbitrage Pricing Theory. According to Wikipedia
Arbitrage pricing theory (APT) is a general theory of asset pricing that holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient. The model-derived rate of return will then be used to price the asset correctly—the asset price should equal the expected end of period price discounted at the rate implied by the model. If the price diverges, arbitrage should bring it back into line.
S. Ross is the Father of Arbitrage Pricing Theory. D. Musto of Wharton recently summarized the key points of Arbitrage Pricing Theory in this podcast
This is a very elegant way to price the whole range of derivative securities out there. So Steve, building on the work of [Fisher] Black and [Myron] Scholes, showed how you could take what they did and think about it as a binomial framework that would help you price a wide range of securities, and show you how you go about replicating the payoff of any derivative security you might be interested in, with this binomial trading technique.
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