Olivier d’Assier discusses modeling the possible outcomes of the election and the potential ramifications of the Biden tax plan on Big Tech. See all the posts from this series: Stress Testing the US Presidential Election: A framework for quantifying market reaction to an unpredictable outcome Presidential Election Stress Test Part II: Biden’s Tax Plan Could […]
The US market saw an even stronger concentration in stocks recently, with FAANGs (Facebook, Amazon, Apple, Netflix and Google) accounting for 14% of the weight in the STOXX USA 900 on Oct. 9. Add Microsoft to the mix, and the six stocks made up 20% of the US index. Just since July, the aggregate weight of these six stocks increased by one percent in the US index.
In this note, we present updated results for the STOXX USA 500 version of our ROOF Market Portfolios. These portfolios include a Risk-On and a Risk-Off variant built directly from the ROOF Scores and constituents of the STOXX USA 500 benchmark portfolio, and rebalanced monthly (at month-end) using the as-of-then sector ROOF scores and exposures (i.e., no look-ahead bias). We will focus on the last 12 months, as this period had several turnarounds in sentiment.
The combination of Axioma Equity Risk Models and STOXX Indices, coupled with improved monitor features, increase the ability of investors to understand the risk environment in which they are operating.
We used the Axioma Risk platform to conduct a transitive stress test simulating a 20% drop in each of the five FAANG stocks, calibrating the correlation between them and the other stocks in the STOXX USA 500 using data for the past three months, and estimating the impact on the index portfolio for this scenario.
We can all agree that understanding risk – specifically, the reason why a risk number has changed – is key for sound portfolio management. This understanding becomes even more important in times of volatility when correlations that once moved in one direction can swing the other way, reducing – or even removing altogether – the diversification that was intended to protect a portfolio. But this change in risk could be down to a number of reasons, making this task quite a challenging one.