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Sector Models: An Insightful View of Risk and Return

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.