Complete Guide to Building the Barra Risk Model
The Barra risk model is one of the best-known multi-factor models in the industry. It was originally proposed by Barra Inc. (founded by Barr Rosenberg) and later acquired by MSCI, so it is now an MSCI asset. You can still find the product pitch for BarraOne on the MSCI website.
Many people who want to learn the Barra model don't know that Barra publishes an official complete guide — the Barra Risk Model Handbook. At 204 pages, it systematically explains how to build a Barra risk model and remains the most authoritative guide available.
Barr Rosenberg majored in literature at UC Berkeley as an undergraduate before switching to economics. Everybody can quant, if you want to.
One common misconception about the Barra model is that it is an investment model for prediction. In fact, it is purely a risk attribution model. The most authoritative statement on this comes from Barra itself:
quote
Of course, MFMs have their limitations. They predict much, but not all, of portfolio risk. **In addition, they predict risk, not return; investors must choose the investment strategies themselves.**tip
For the mathematical foundations of factor analysis, see [Chapter 14](/assets/ebooks/methods of business analysis and forecasting.pdf) of Peter Tryfos (York University professor)'s *Methods of Business Analysis and Forecasting*, which gives a remarkably clear introduction.
