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st: Methodology question

From   Prasad Ramani <>
Subject   st: Methodology question
Date   Wed, 16 Jun 2010 21:10:18 +0400

Dear Statalist,

I am new here and my question is quite different from what is normally
asked here. I have a few questions more from an application point of

The Project
I am analyzing a multi asset class portfolio whose composition has
changed over the years from mainly equities to a mix of equities,
fixed income, hedge funds & private equity. The objective of the
analysis is to find which risk factors the portfolio is exposed to and
how to hedge them. The data is a monthly series of returns of this
portfolio for the past 7-8 years.

My Proposed Methodology
1. Get monthly returns for a list of indices that represent the major
asset classes: For equities: SP500, MSCI World etc., for Fixed Income:
BarCap US Aggregate Bond fund, JP Morgan Emerging Market Bond index,
for Commodities: Gold, Oil, for Interest rates: 3 month LIBOR etc. I
end up with about 15 such factors...Factor 1 to Factor 15.

2. I come up with a correlation structure for these 15 factors based
on weekly/monthly returns going back to about 3 years.

3. I regress the returns of my portfolio against these 15
factors...and based on the t-stats of the factors and the overall adj
r-squared, I eliminate those factors that are insignificant at 5%

4. I expect the ones with low t-stats to be highly correlated to some
other factors...and this can be verified from the above Var-Covar
matrix (point 2)
Finally I end up with those factors that have significant t-stats,
F-stat and adj r-squared.

I would really appreciate if you can give me your views on this.

Many thanks,
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