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Financial Research Company. Financial Research Company. Own model, database Improve portfolio performance Quantitative method. Background. Providing services since 1975 Risk management technology and decision support tools and products. Research + Indexes. S&P / Barra Indexes
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Financial Research Company • Own model, database • Improve portfolio performance • Quantitative method
Background • Providing services since 1975 • Risk management technology and decision support tools and products
Research + Indexes S&P / Barra Indexes Pioneered by William Sharpe Eugene Fama Kenneth French
Index Name Symbol • S&P/Barra 500 Value ^SVX • S&P/Barra 500 Growth ^SGX • S&P/Barra MidCap 400 Value ^MUV • S&P/Barra MidCap 400 Growth ^MGD • S&P/Barra SmallCap 600 Value ^CVK • S&P/Barra SmallCap 600 Growth ^CKG
Book-to-price ratio HIGH B/P (Value Index) LOW B/P (Growth Index) S&P
Outgrowth of research Fama and French – combination of B/P ratios and market capitalization explain much of the cross-sectional variability in average stock returns over period from 1963 to 1990
Other benefits Book to price ratio tend to be more stable over others (P/E ratio, historical earnings growth rates, ROE)
MKMV Background • Acquired by Moody’s Corporation & merged with its Moody’s risk management services subsidiary in 2002 April. • Headquartered in San Francisco • Now we just simple call that “MKMV”
Products Credit risk
Credit Risk / Default Risk • The possibility that a bond issuer will default, i.e. fail to repay principle and interest in a timely manner.
EDF • Probability that a firm will default over a specified period of time • Three Keys that determine a firm’s EDF credit measure: • The current market value of the firm (market value of assets) • The level of the firm’s obligations (default point) • The vulnerability of the market value to large changes (asset volatility)
Products PDs - Probability of Default
Portfolio management • Credit risk for entire portfolio • Portfolio risk and return is driven by the connection between changes in default risk and changes in credit spreads