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Multifactor Theory, often associated with finance, posits that multiple factors drive asset returns beyond a single market factor. This approach suggests that various risk factors, such as size, value, and momentum, can explain the performance of investments. By analyzing these factors, investors can better understand risk and enhance portfolio diversification. Multifactor models, like the Fama-French three-factor model, extend the Capital Asset Pricing Model (CAPM) by incorporating these additional variables.

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