Risk Management Using Factor Models

The concept of risk and return is at the core of any sound investment decision. In this context, for decades, factor models have been at the heart of quantitative portfolio construction. They are widely used to construct risk models—e.g. by well-known providers of risk models such as MSCI-Barra, FactSet, and Bloomberg—and to estimate expected returns (e.g. by Fama and French, 1993). Recently, institutions such as BlackRock, AQR and many others have an increased focus on the further development of these existing and proven models. This way, the increasingly complex influencing factors and interdependencies in the dimensions of risk and return are to be better captured, thus optimizing risk-adjusted returns.

Objectives

The focus of this Master Class is to convey the latest findings with regard to the general understanding of and in particular the application of factor models in investment and portfolio management. The most popular factor models will be explained using practical examples, and current industry standards will be examined and critically scrutinized. We will also show how up-to-date environmental, social, and corporate governance (ESG) factors can be incorporated into factor modeling and quantitative investment management.  

• Introduction to factor models
  – The Barra factor model of covariance matrix returns
  – How to use a risk model to decompose a portfolio into its risk exposures
• Factor risk models applied in practice
  – Becoming acquainted with different industry standards such as MSCI Barra, FactSet, and Bloomberg
  – Discussion of the feasibility and advantages/disadvantages of using in-house solutions versus outsourcing
  – Exploring use cases in practice
• Group activity: Factors—What freedom to choose?
• Factor risk models and efficient asset allocation
  – How to target any linear criteria, such as ESG scores or expected return
  – Is there a link between ESG scores or expected return and risk factors?

We are happy to support the SFI Master Classes as a cooperation partner of the Swiss Finance Institute (SFI). They offer experienced banking and finance professionals a unique opportunity to exchange knowledge and share their professional views with high-ranking academics and industry experts in an interactive learning environment. The Master Classes include practical group work and opportunities for discussion.

SFI Master Classes are offered free of charge to employees of companies affiliated with the Swiss Bankers Association (SBA) as well as to employees of FINMA and Swiss National Bank (SNB). The events in Zurich are also open to all employees of member companies of the Zurich Banking Association.

The master classes are acknowledged SAQ recertification measures and comprise four learning hours. Further information on the profiles and the topics covered can be found at sfi.ch/mc.

We look forward to lively participation and a stimulating exchange between industry and academia.

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