Risk Contributions - PCTR and CTR – Fabric

How does Fabric identify the sources of risk within your portfolios?

Fabric uses the Factor covariance matrix from MSCI. This factor covariance matrix underpins the MSCI Multi-Asset Class(MAC) factor model. Using this covariance matrix and the factor exposures for a portfolio of assets, Fabric computes risk analytics for its platform.

The intent of computing the risk contributions from different factors or different asset classes is to provide an insight into the sources of risk for a given portfolio.
Imagine your portfolio as a pie, where each slice represents an individual asset. The Contribution to Risk (CTR) of each asset tells you the absolute size of its slice, measured in terms of volatility units . So, a large CTR slice means that asset contributes significantly to the overall volatility of the pie.

Now, imagine we bake another pie, identical in size but divided into slices based on Percent Contribution to Risk (PCTR). Here, each slice represents the percentage of the total pie that each asset contributes. Think of it like dividing each CTR slice by the total size of the pie (the portfolio's volatility).

The key difference is the scale:

CTR: Measures absolute contribution, like the area of each slice in terms of square inches.
PCTR: Measures relative contribution, like the percentage of the total pie area each slice represents.

Therefore, if you sum the CTRs of all assets, you get the total volatility of the portfolio (the size of the pie). But if you sum the PCTRs, you get 100%, representing all the slices adding up to the whole pie.

So, both CTR and PCTR provide valuable insights, but they offer different perspectives on how each asset contributes to the overall risk profile of your portfolio. CTR gives you the raw size of the impact, while PCTR shows you the relative importance within the bigger picture.

How does Fabric identify the sources of risk within your portfolios?

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