Patent ID: 7752099

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, using a computer programmed with software for performing a time series regression to obtain the sensitivity of each security's return to variations in the risk factor's return; using a computer programmed with software for projecting the risk factor covariance matrix into a future forecast, thereby producing a future forecast of the risk factor covariance matrix; and using a computer programmed with software for 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.