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Factor Exposure Analysis 117: Risk Contribution Analysis

Intuitive vs quant risk reports

Nicolas Rabener
10 min read
10 Nov 2025

SUMMARY

  • The choice of indices and regression type leads to different risk contributions
  • Technically, most risk of equity funds can be attributed to a single variable
  • Elastic net is advantageous over linear and lasso regressions

INTRODUCTION

In our recent research article Factor Exposure Analysis 116: Residualized Indices, we explored a method to reduce correlations among independent variables, such as country stock market indices, in regression analyses. Practically, this involved a two-step process: first, removing the global stock market effect, and second, residualizing country indices against other countries and sector indices against other sectors. The result is a set of indices that are “purer” than the raw indices.

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