Equity Risk

Equity returns are sensitive to systematic and idiosyncratic factors, all of which are captured in ERM. Systematic factors include sector and country returns. ERM covers 10 equity sectors in all developed countries and many developing countries.

ERM uses a multi-factor model to assess equity risk. The factors that represent equity risk come from industry sectors. For every country Dow Jones defines eleven sectors:

• Specific risk is the risk that is unique to a company and cannot be explained by market movements. Specific risk can be diversified away
• Sector risk is that risk which is common to a sector and can not be diversified away
• Larger companies tend to have less specific risk contribution to total risk than do smaller companies
• Volatilities and correlations of sector returns are calculated from the historical prices that are provided by Dow Jones