Risk factors

Introduction to Portfolio Analysis in Python

Charlotte Werger

Data Scientist

What is a factor?

Factors in portfolios are like nutrients in food

Pie chart to compare nutrients in food to factors in a portfolio

Factors in portfolios

Different types of factors:

Macro factors: interest rates, currency, country, industry
Style factors: momentum, volatility, value and quality

Style investment factors

Using factor models to determine risk exposure

Table containing tactical, strategic and risk management applications of investment factors

¹ Source: https://invesco.eu/investment-campus/educational-papers/factor-investing

Factor exposures

df.head()

date        portfolio    volatility    quality    
2015-01-05    -1.827811    1.02        -1.76
2015-01-06    -0.889347    0.41        -0.82
2015-01-07     1.162984    1.07         1.39
2015-01-08     1.788828    0.31         1.93
2015-01-09    -0.840381    0.28        -0.77

Factor exposures

df.corr()

            portfolio    volatility    quality
portfolio     1.000000    0.056596    0.983416
volatility    0.056596    1.000000    0.092852
quality       0.983416    0.092852    1.000000

Correlations change over time

# Rolling correlation
df['corr']=df['portfolio'].rolling(30).corr(df['quality'])

# Plot results
df['corr'].plot()

Rolling correlation with quality

Plot of rolling correlation between quality factor and portfolio returns over time

Let's practice!

Introduction to Portfolio Analysis in Python