The Number of Factors in Security Returns.

Both factor analysis of security returns and the analysis of eigenvalues seem to indicate that a market factor explains the major part of security returns. The author finds that such evidence is consistent with an economy where there are, in fact, k "equally important" priced factors; eigenvalue analysis in the context of such an economy will lead an investigator to the false inference that the one important "factor" is the retun on an equally weighted market index. Copyright 1989 by American Finance Association.