Cross-sectional volatility is given by the standard deviation of a set of asset returns over a single time period. CSV is critical because it represents the opportunity to outperform a benchmark. In this Research Insight, we present an exact methodology for decomposing CSV into contributions...

In this paper we examine three approaches for capturing equity risk premia. In the "simple" approach, the manager goes long stocks with positive exposure and shorts stocks with negative exposure, but makes no effort to control for other exposures or to minimize risk. In the "pure" approach, the...

We investigate the relative strength of industry versus country effects in the global equity markets during the sample period 1994-2010. In particular, we examine three market segments: (a) the world market, (b) emerging markets, and (c) developed Europe. We employ a factor-based approach to...

While performance analysis is typically conducted on a benchmark-relative basis, risk analysis is often presented on an absolute-return basis. This mismatch between sources of risk and return leads to the pitfall that active management decisions cannot be evaluated on a risk-adjusted basis. In...

We compare the accuracy of risk forecasts from single-country models and GEM2 for portfolios concentrated in single countries. We find that single-country models provide more accurate risk forecasts, consistent with intuition. This demonstrates the importance of local factor structure for...

Risk analysis involves gaining deeper insight into the sources of risk, and evaluating whether these risks accurately reflect the views of the portfolio manager. In this paper, we show how to extend standard volatility analytics to shortfall, a measure of extreme risk. Using two examples, we...

A key to deeper understanding of factor models lies in the concept of factor-mimicking portfolios, whose returns exactly replicate the payoffs to the factors. Simple factor portfolios are obtained by considering each factor in isolation, whereas pure factor portfolios are constructed by treating...

Quantitative risk management relies on a constellation of tools that are used to analyze portfolio risk. We develop the standard toolkit, which includes betas, risk budgets and correlations, in a general, coherent, mnemonic framework centered around marginal risk contributions. We apply these...

Brinson sector-based attribution explains active return in terms of intuitive allocation and selection decisions. However, it cannot easily disentangle competing industry and style effects. We introduce a special type of factor model with five defining characteristics that exactly replicates the...