What is a Barra Risk Factor Analysis?
The Barra Risk Factor Analysis is a metric used in measuring the overall risk associated with security relative to the market risk. The Barra Risk factor was developed by Barra Inc and thereafter named after the company. It is a multi-factor model that incorporates more than 40 data metrics including senior debt trading, earnings growth, and many others.
How is a Barra Risk Factor Analysis Used?
The founder of Barra Inc., Bar Rosenberg pioneered the creation of the Barra Risk Factor analysis. There are three major components considered in this risk factor, these are a company-specific risk, industry risk, and risk from exposure to different investment themes. The Barra Risk Factor Analysis is crucial to investors since it measures the risk associated with security, investment, or portfolio relative to the market risk. When making investment decisions, evaluating the risk involved is important, the level of risk of investment determines to a great extent the level of return. Also, the investment goals and risk tolerance level of investors make evaluating investment risks essential. There are several metrics or factors models that investors and portfolio managers use to measure the risk of a security, the Barra Risk Factor analysis is one of the acceptable measures. Factor models are divided into three categories; the single-factor models, multiple-factor models and the multi-factor models. The Barra Risk Factor Analysis is a multi-factor model that embodies over 40 factors that predict the risk associated with a security or investment and also manage it. Some of the factors that this factor model incorporates include;
- Earnings growth
- Share turnover
- Momentum
- Volatility
- Liquidity
- Senior debt rating
- Price earning ratios
- Leverage
- Size, and a couple of other factors.
When measuring the overall risk of a security relative to the market today, the Barra Risk Factor Analysis uses a single VaR number (value-at-risk).
