Quantitative investing
In factor investing, the term 'factor premium' can be replaced with 'risk factor' or 'risk premium', on the supposition that a factor premium represents compensation for higher risk.
However, the question remains as to whether the premiums actually represent compensation for higher risk or whether other aspects also play a role. If the first is true, the term risk factor is appropriate. This is in line with the belief in an efficient market, where returns and risk go hand in hand.
R-Labs prefers the term 'factor premium', as it is not always necessary to take more risk to earn such premiums. The most familiar example is the low-volatility factor (low vol). While investors actually take less risk using this factor, the returns they can expect match the market.
