Patent ID: 8019670

Claim:
A method for generating risk forecasts in financial securities, comprising the steps of: selecting a set of securities; selecting at least two risk factors associated with investment risk in the securities; determining, for each selected risk factor, the risk factor's return; constructing a risk factor covariance matrix corresponding to the selected risk factors; constructing an idiosyncratic variance matrix corresponding to the securities in the selected set of securities; determining, for each selected risk factor, a risk factor loading coefficient for each security in the set by, at the least, performing a time series regression to obtain the sensitivity of each security's return to variations in the risk factor's return; projecting the risk factor covariance matrix into a future forecast, thereby producing a future forecast of the risk factor covariance matrix, wherein the step of projecting the risk factor covariance matrix into a future forecast comprises utilizing information in implied volatility; and projecting the idiosyncratic variance matrix into a future forecast, thereby producing a future forecast of the idiosyncratic variance matrix, wherein the determined risk factor loading coefficients, the future forecast of the risk factor covariance matrix, and the future forecast of the idiosyncratic variance matrix can be used together to determine a forecast of the variance-covariance matrix for all securities in the selected set of securities.