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I. Overview

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Introduction: Evolving Beyond Traditional Risk Models

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Equity markets are dynamic systems where the primary drivers of risk and return shift decisively over time. Traditional multi-factor models—built on style factors like value, size, and momentum—have been useful in explaining cross-sectional stock returns. However, they often treat macroeconomic risk as a secondary concern or a residual, potentially missing the critical regime shifts where macro forces become the dominant source of market volatility and premia

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Our research introduces a paradigm that places the macro-to-idiosyncratic risk spectrum at the center of investment strategy. We argue that identifying whether the market is driven by systemic macroeconomic fear or company-specific fundamentals is the key to harvesting consistent premia. The Qi Macro Factor Equity Risk Model (MFERM) quantifies this spectrum for every stock, enabling the construction of a dynamic strategy that adapts to the prevailing regime, systematically tilting towards the most relevant source of risk premia.

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In summary, we show using extensive data and a rigorous test that:

• Equity markets have two main engines driving returns

• Most equity investors focus on only one of these engines

• The result is that portfolio returns are misattributed regularly and “alpha wastage” from leaving the macro engine unused is commonplace

• Portfolio construction is an important source of alpha when both engines are used

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