Sector risk models are useful tools to evaluate the risk and performance of sector-specific portfolios, because they are aligned with the investment universe. This alignment leads to risk and performance attribution that more accurately reflects the portfolio manager’s investment philosophy.In the latest Barra Insight, we examine the risk and return dynamics of US economic sectors using the Barra US Sector Equity Models and compare the performance of sector-specific styles over...

An important component of an effective risk model is its ability to evaluate relevant sources of risk. There are various determinants of what make these sources relevant: data, factor structure, and methodology. This document examines the effects of using a sector model built from a specific estimation universe that mimics the investment universe of the portfolio manager, leading to risk and performance attributions that may reflect the manager’s investment philosophy more accurately.

This article examines how stock exposures to the Volatility factor, as defined in the Barra Global Equity Model 2 (GEM2), can be used to understand how a portfolio is positioned for changes in risk aversion. In a previous note “The Volatility Factor and Risk Aversion,” presented in the Q1 2012 newsletter, we explained how returns to the Volatility factor can provide a measure of investors’ risk appetite. Now we extend this analysis and show how specific groups of stocks,...

This article examines how Barra factors can be used to better understand the market environment. We analyze the 2011 equity markets and observe the performance of some Barra factors during market events. We also investigate relationships between the returns to the Barra Volatility1 factor and the levels of implied volatility, as measured by the CBOE Volatility Index (VIX). The factors that we focus on are defined in the Barra Global Equity Model (GEM2), a global multi-factor risk model used...