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Factor Drift Methodology
Factor Drift Methodology

Automatic calculations display how a factor's current risk & exposure sizes up against its historic values

J
Written by Jeremy Mulder
Updated over a week ago

The Omega Point application provides portfolio analysis tools that include describing how a portfolio's factor risk & factor exposure have deviated from their historic values. This is described as a factor's drift and can be found in the right-hand column when using the Analyze: Risk and the Analyze: Exposure modules

Drift is categorized by the following percentile buckets:

`Very High`: 95% - 100%
`High`: 75% - 95%
`Neutral`: 25% - 75%
`Low`: 5% - 25%
`Very Low`: 0% - 5%

1. Drift is calculated for the specified date range
— when the date range value is less than 3 months, the app automatically uses as many dates as possible to get a statistically significant drift calculation.

2. Selecting a factor category will display historical factor exposure values [or a factor's risk decomposition values, when using Analyze: Risk].

3. Dynamically interact with the graph, and introspect any particular date (dashed line), then...

4. Display that date's weighted-average factor exposures in the right-hand column, and it's drift (red, blue arrows).

# Drift Methodology

1. Find the mean and calculate the standard deviation over the full date range*

2. Find the difference from today's value from the mean, divided by the standard deviation

driftValue = (todaysValue - mean) / deviation

3. The driftValue is then bucketed into it's respective percentile by the following categories

driftValue < -1.645σ = Very Low
driftValue < -0.674σ = Low
driftValue < 0.674σ = Neutral
driftValue < 1.645σ = High
driftValue > 1.645σ = Very High

The range [-0.674σ, 0.674σ] represents the range of z-scores that can be mapped for the middle 50% of any set, i.e.
`Neutral`: 25% - 75%

The range [0.674σ, 1.645σ] & [-0.674σ, -1.645σ] corresponds to the next 20% of values falling into their respective buckets
`High`: 75% - 95%
`Low`: 5% - 25%

And values that fall above or below +/- 1.645σ correspond to the last 5% of values
`Very High`: 95% - 100%
`Very Low`: 0% - 5%