Risk Factor Models

Risk factor models are tools used to understand and estimate potential risks in investments or financial portfolios. They identify key elements—such as economic conditions, interest rates, or market trends—that influence asset performance. By analyzing how these factors impact returns, the models help investors assess risk levels, diversify effectively, and make informed decisions. Essentially, they break down complex risks into measurable components, providing a clearer picture of what could affect investments and enabling better management of potential losses.