PROPRIETARY RISK AND VOLATILITY FORECASTING
PIQ calculates specific price volatility for each company and each ETF in its universe. The volatility forecast is based on a multi-factor model that determines a company’s potential to be have either stable or unstable prices, based on the company’s factor profile. Factors such as sensitivity to credit spreads, EBIT variability and overall market size, among others, are combined in an APT type model to forecast inherent risk. Originally developed to price option implied volatility this particular statistic finds other valuable purposes in determining a company’s specific discount rate and investor suitability ratings
THE RISK FORECASTING MODEL
PIQ combines various FTSE/BIRR return sensitivities (Investor Confidence, Business Cycle) with its own proprietary risk descriptors to forecast a company’s market relative volatility potential. The volatility descriptors are presented in the table and in a bar chart format as shown above.
The company in this example is identified as Low Risk, meaning lower expected price variability in comparison to the market.
Specifically Cisco is expected to be 47% less volatile than the market. The market in this case is PIQ’s total universe of 1000s of North American stocks. The average return volatility in this universe is approximately 32% annual standard deviations of returns. Cisco, in our example is expected to produce a standard deviation of annual returns in the neighborhood of 15.14% as calculated by .473 multiplied by 32%.
This simply means that the company in our example, Cisco Systems, is expected to display above average stability relative to all stocks in the PIQ system.