Eta® Analysis

MacroRisk Analytics provides the first statistically sound, scientifically tested methodology for measuring the economy’s influence on investment prices. Investment Advisers can use our tools to reduce downside volatility and insulate against world events. More importantly, you can accomplish this without needing to choose economic or political scenarios or having to guess the future direction of the economy.

Defend your clients against economic risk, navigate through economic turmoil and harness the power of the changing economy. MacroRisk Analytics’ patented system reliably accounts for over 90% of price variation in most stocks, mutual funds, and ETFs.

MacroRisk Factors

MacroRisk Analytics has discovered 18 macroeconomic and financial variables that greatly influence the performance of most individual assets. These variables are called MacrosRisk Factors. When the effects of the 18 MacroRisk Factors are taken together, they represent the influence of the entire economy on an asset’s price. These factors are:

FTSE 100 Gold Index Corporate Bond (BAA) Yield Consumer Price Index Short-Term Gov’t Bond Yield Intermediate-Term Gov’t Bond Yield Long-Term Gov’t Bond Yield Tokyo Stock Exchange Index Euro Exchange Rate

Agricultural Exports Housing Starts Monetary Base M2 Money Supply Corporate Cash Flow Unemployment Rate Auto Sales New Durable Goods Orders Energy Prices

Eta Measures

An Eta Measure is a description of how an asset typically responds to a specific change in the economy. Every asset has 18 Eta Measures, one for each of the 18 MacroRisk Factors. Eta Measures that are positive indicate that an asset increases in value when the corresponding MacroRisk Factor rises; conversely, Eta Measures that are negative indicate that an asset’s price descreases when the corresponding MacroRisk Factor rises. Together, the 18 Eta Measures show an asset’s overall relationship to the economy.

Composite MacroRisk Index

The Composite MacroRisk Index (CMRI) is a patented measure of a stock, fund, or portfolio’s sensitivity to the economy. The higher an asset’s CMRI, the more sensitive it is to changes in the 18 MacroRisk Factors, and so the more volatile it is likely to be. In contrast, assets with a low CMRI have less economic risk – they are less likely to react strongly to macroeconomic change, and so are more stable. Following are representative CMRI values for December 16, 2011:
 

Asset	CMRI
DFINX (Money Market Fund)	0
SPX (S&P 500 Index)	57
IBM (IBM Corp.)	136
CROX (CROCS Inc.)	593

Economic Climate Rating

MacroRisk Analytics’ Economic Climate Rating serves as an indicator of whether the economy will be driving the price of a security, index or portfolio up or down in the coming 6 to 12 months. The Economic Climate Rating measures how favorable or unfavorable the current economy is to a particular asset. Assets with a high Economic Climate Rating are being helped by the current economy while assets with a low Economic Climate rating are negatively impacted by the current economic climate.

An Economic Climate Rating of 1 or 2 stars indicates that the economy will likely have a negative impact on the price of a security in coming months. A 3 star Economic Climate Rating indicates that the economy should have a neutral impact, and a 4 or 5 star Economic Climate Rating indicates that the economy will most likely have a positive impact on the price of the security in the next 6 to 12 months.

Combining the information gathered from the Composite MacroRisk Index and the Economic Climate Rating is a powerful way to reduce downside volatility no matter what your clients’ risk tolerances. Combining a 4 or 5 star Economic Climate Rating with the Composite MacroRisk Index can cut out downside volatility, barring outside interference not pertaining to the economy.

Economy’s Influence (R²)

The Economy’s Influence is a measure of how much the economy affects a particular asset’s price, on a scale from 0 to 100%. The higher the R², the more influence the economy has on the price of a security.

Changes in the 18 MacroRisk factors reliably accounts for over 90% of price variation in most stocks, mutual funds, and ETFs.

Beta+ Statistics

In addition to an asset’s standard Alpha and Beta values, MacroRisk Analytics reports a wide range of other useful statistics, called Beta+ statistics:

Up-market and Down-market Alpha and Beta Sharpe Ratio Sortino Ratio Treynor Ratios Average annual return Return’s standard deviation

Up-market (Down-market) statistics for an asset are calculated with price data on days when the closing price of that asset’s benchmark was higher (lower) than the benchmark’s opening price. An Up-market (Down-market) Beta indicates whether an asset is generally more or less volatile than the market on days when the benchmark gains (loses) value. An Up-market (Down-market) Alpha indicates an asset’s level of returns compared to a benchmark on days when the benchmark gains (loses) value. By using down market beta rather than standard beta your investments won’t be penalized with higher beta for performing well in an up market.

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