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Identifying Sources of Correlation in Global Equity Portfolios
Sep 28, 2010
153 factors, the Barra Global Equity Model (GEM2) provides a rich and granular view of the global equity space and the main sources of return and risk. However, having 153 factors leads to 11,628 unique correlations/covariances between factors, which makes it a challenge for managers to assess correlations in a meaningful way. In this Research Bulletin, we show how the correlation (covariance) information can be aggregated into groups, such as diagonal and off-diagonal blocks based on factor types. We also show an even more intuitive way to understand which factors carry the most risk by using the Correlation Risk Attribution framework proposed by Davis and Menchero.
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