Mapping a Fixed Income Portfolio to Risk Factors
This video by explains the concept of mapping fixed income portfolios to risk factors.
Why map portfolios to risk factors? It's a shortcut because portfolios are complicated; e.g., even delta-normal VaR employing a covariance matrix contains n(n+1)/2 pair-wise correlations in a dreaded "curse of dimensionality." The reality of a portfolio's true risk exposure is both ultimately unknowable and undeniably complex. Mapping reduces the portfolio to a few key characteristics. The approximation sacrifices accuracy but makes the portfolio amenable to, say, stress testing.
This video is developed by David from Bionic Turtle.