https://www.vanguardcanada.ca/documents ... h-tlrv.pdf
A factor-based investing framework integrates factor exposure decisions into the portfolio construction process. The framework involves identifying factors and determining an appropriate allocation to the identified factors. But what are factors? Factors are the underlying exposures that explain and influence an investment’s risk. For example, the underlying factor affecting the risk of a broad market-cap-weighted stock portfolio is the market factor, also called equity risk. That is, we can consider market exposure as a factor. In this case, not only does the factor exposure influence the risk of a market-cap portfolio, but it has also earned a return premium relative to a “risk-free” asset (often assumed to be short-term, high-quality sovereign debt). Historically, this premium has been a reward to the investor for bearing the additional risk inherent in the market factor.