Factor analysis
The factor analysis tab, found on the analysis tab on the right side of the application, can be opened from any screen.
The data represents the risk for the selected portfolio in the main grid, to the left. By default, the factors are sorted from highest R2 to lowest R2. If the R2 is 100%, then all the risk in the portfolio is explained by this single factor. If the R2 is zero, then the factor does not account for any risk in the portfolio.
The “Idio(%)“ column indicates the fraction of risk that is idiosyncratic, relative to the selected factor. This is equal to 1 − R2.
The "Beta Exp(%)" column indicates the portfolio’s sensitivity to the factor. If a portfolio has a beta exposure of 50% to a factor and the factor undergoes a 4% return, then we would expect the portfolio’s profit to be 50% x 4% = 2% higher than it would be otherwise.
To ensure that we capture the full sensitivity of a portfolio to a factor, the beta exposure is based on a regression that includes the return of the factor as well as the previous day’s returns. The beta exposure is the sum of the sensitivity to both these independent variables. You can read more about the math behind the calculation of beta here.
The "Factor σ(%)" column indicates how much additional P&L we would expect from a one standard deviation move in the factor. It may be equally risky for a portfolio to have a high beta to a low volatility factor, as it is to have a low beta to a high volatility factor. From a risk perspective, what we really care about is the product of the beta exposure and the volatility of the factor. This is what "Factor σ(%)" represents. For this calculation we use the one-day standard deviation of the factor.
"t-Stat" is the Student’s t Statistic of the beta exposure. Factors that are not significant at the 95% level are shown in light-gray.
In order to determine which securities are contributing the most to a particular factor exposure, you can add any factor to the main grid. Simply right-click on the factor and choose “Add field to grid“.
Information about the factors can be found on the Detail tab of the factor analysis tab.
Additional information about our curve factors is available here.