INVESTMENTRISK-GlobalBusinessSolutions.pdfVIP

ARTICLE INVESTMENT RISK APT Investment Risk Risk factor models: Five facts that enable Fundamental factor models smarter decisions ●● Start out by identifying micro-economic traits of assets, such as industry membership, financial ratios and Risk factor models are the widely accepted standard method exposure to technical indicators. for measuring market risk, as they show how the return on ●● Then the impact certain events may have on any portfolio of assets is influenced by different economic individual stocks is determined based on publicly factors such as changes in interest rates, FX rates, inflation, available information. and oil prices. There are several types of factor models, but all are constructed using factor analysis techniques and can ●● Next, a set of factors is pre-specified based on what the be divided into three basic categories: statistical, risk model provider deems logical, e.g. value, growth, macroeconomic, and fundamental. sectors, interest rates, etc. Finally, statistical regression is applied to map historical stock prices onto factor Different factor models include different factors – values to infer the exposure of each stock to each factor. but which ones are the right ones to include? ●● Only after all these different assumptions are made can The debate around fundamental factor models, which the fundamental factor model be