PROVIDING TOOLS TO ENABLE USERS TO ANALYSE US PORTFOLIOS FOR EXPOSURES/SENSITIVITIES TO A RANGE OF MACRO-ECONOMIC FACTORS
The FTSE BIRR model identifies five primary risk factors based on economy-wide surprises to which stocks are exposed:
Confidence Risk - reflects a stock's sensitivity to unexpected changes in investor confidence. Investors always demand a higher return for making relatively riskier investments. When their confidence is high, they are willing to accept a smaller reward than when their confidence is low.
Time Horizon Risk - reflects a stock's sensitivity to unexpected changes in investor's willingness to invest for the long term.
Inflation Risk - reflects a stock's sensitivity to unexpected changes in the inflation rate.
Business Cycle Risk - reflects a stock's sensitivity to unexpected changes in the growth rate of business activity.
Market Timing Risk - reflects a stock's sensitivity to moves in the stock market as a whole that cannot be attributed to the other factors.
An overview of our approach to controlling for economy-wide surprises, including unexpected changes in long- and short-term interest rates, inflation, the real growth rate of the economy and market sentiment, is available here.
A broader research paper by Edwin Burmeister, Richard Roll and Stephen A. Ross entitled 'Using Macroeconomic Factors to Control Portfolio Risk' is available here.
Rewards to macroeconomic factors
Click here to see a number of charts that compare the cumulative rewards attributable to assuming FTSE USA levels levels of exposure to the FTSE BIRR macroeconomic factors with the total return to the FTSE USA Index over various periods.
About FTSE BIRR
The FTSE BIRR Macro Economic Risk model was developed by four leading academics – Edwin Burmeister, Roger Ibbotson, Stephen A. Ross and Richard Roll – to analyse US portfolios for exposures/
sensitivities to a range of macroeconomic factors.
BIRR Portfolio Analysis, Inc was purchased in March 2010.