EDHEC-Risk Institute October 2016

Multi-Dimensional Risk and Performance Analysis for Equity Portfolios — October 2016

3. Applications of Fundamental Beta

Figure 19: Absolute Risk Decomposition Using Euler Decomposition of the Equally-Weighted Portfolio of the S&P 500 Universe on the Market Factor with Fundamental and Sector Attributes (Method 3) The coefficients of the one-factor model are estimated with a pooled regression of the 500 stocks from the S&P 500 universe. Data is quarterly and spans the period 2002-2015, and market returns are from Ken French's library. Attributes (capitalisation, book to-market and past one-year return) and sector classification come from the ERI Scientific Beta US database and are updated quarterly. We use formula (3.3) to make the performance attribution.

Figure 20: Relative Risk Decomposition Using Euler Decomposition of the Equally-Weighted Portfolio of the S&P 500 Universe on the Market Factor with Fundamental and Sector Attributes (Method 3) The coefficients of the one-factor model are estimated with a pooled regression of the 500 stocks from the S&P 500universe. Stocks’ returns are in excess of market portfolios returns. Data is quarterly and spans the period 2002-2015, and market returns are from Ken French's library. Attributes (capitalisation, book-to-market and past one-year return) and sector classification come from the ERI Scientific Beta US database and are updated quarterly. We use formula (3.3) to make the risk attribution.

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An EDHEC-Risk Institute Publication