About MethodTech Risk Models 

Modern investing lives at the intersection of theory, data, and process. Our objective is to deliver risk analytics that are economically interpretable, empirically robust, and operationally useful across the full investment lifecycle—from research and idea generation to portfolio construction, risk control, and performance attribution. 

MethodTech’s 39-factor model is a fundamental multiple-factor model (MFM) designed for daily use in single-country and multi-regional equity portfolios. It combines: 

• 1 Market factor (unit exposure)
   

• 12 Style factors (cross-sectional attributes)
   

• 26 Industry factors (mutually exclusive, collectively exhaustive)

We emphasize transparent construction, disciplined standardization, and ongoing diagnostics so users can both trust the numbers and understand what they mean for portfolios. 

Introduction

This handbook provides a practitioner-oriented guide to the model, detailing what it is, how it is constructed, and how to use it responsibly. 

Who should read this:

• Portfolio managers seeking to align active bets with well-measured risks
   

• Risk teams managing constraints, limits, and scenario awareness
  
  

• Quants & researchers evaluating factor definitions, stability, and efficacy
   

• Attribution & reporting professionals producing clear, defensible narratives

What this handbook is (and is not):

• A method and usage guide for a live, production risk model.
  
  

• Not a prescriptive alpha manual; it does not recommend securities or strategies.
   

INEC-1 — Indian Equity Consolidated-1 

INEC-1 is MethodTech’s India-focused, production-grade 39-factor equity risk model (1 Market, 12 Style, 26 Industry) for daily portfolio construction, risk control, and attribution. 

Coverage Universe (India — all listed equities)

All Indian listed equity issuers across BSE and NSE (common equity; core model excludes ETFs/InvITs/REITs/funds unless specified) ~5,000. 

Estimation Universe 

Definition. The liquidity- and data-screened subset used for daily factor and covariance estimation. 

Sizing rule. Approximately 25% of Coverage. With Coverage ≈ ~5,000 names, Estimation Universe ≈ ~1,250 securities.  

General notes (applies to all style descriptors) 

• Inputs are winsorised where appropriate, then z-scored cross-sectionally (unit scale, outlier control). 
  
  

• Daily cross-sectional returns are estimated via regression with: Market (unit exposure), Style (continuous), and Industry (dummies). 
  
  

• Industry factor returns use a sum-to-zero constraint, so they capture relative industry performance vs the market. 
  
  

• Factor covariance and specific risk are estimated with stability and positive-definiteness in mind.
  
  

Factor Descriptions (39 Factors)

1) Market Factor

Construction

• Every stock has a loading of 1 to the Market factor, representing the systematic component common to all securities.

Interpretation

• The Market factor is the baseline driver of equity returns. Exposure is unavoidable in long-only portfolios; attribution relative to it reflects active bets elsewhere. Tilt here reflects macro risk appetite, liquidity, and sentiment. High reliance increases drawdown sensitivity but ensures participation in rallies; neutralization is typically feasible only in long-short/hedged setups.
  
  

2) Style Factors (12)

Style factors capture systematic characteristics (e.g., size, value, momentum, volatility, growth) that cut across industries and regions—distinct from sector membership. Each stock’s exposure is derived from measurable descriptors (e.g., book-to-price for Value, trailing volatility for Risk) and standardized cross-sectionally. They reflect persistent attributes, investor behaviour, and structural themes shared by similar securities. Including style factors explains cross-sectional return patterns not captured by Market or Industry, improving risk decomposition and attribution. 

INEC-1 includes 12 style factors used for portfolio construction, risk control, and performance analysis. 

• 2.1 BETA 

Construction

• Stock-level CAPM beta vs the market portfolio; normalized and standardized cross-sectionally.

Interpretation

• Identifies securities that amplify or dampen market cycles. High beta magnifies upside/downside (tactical, but risky in stress). Low beta is defensive and can anchor drawdowns. Portfolio beta tilts shape the risk–reward balance.
  
  

• 2.2 SIZE 

Construction

• Negative logarithm of market capitalization (higher values = smaller firms); normalized and standardized.

Interpretation

• Encodes the large-cap vs small-cap divide. Smaller firms offer higher potential but with higher volatility and lower liquidity; large caps provide stability/institutional sponsorship. Exposure shows where the portfolio sits on the growth–stability spectrum. By modelling the size factor in this way, the model isolates the relative performance of small versus large companies beyond what is explained by market or industry influences.
  
  

2.3 STREV (Short-Term Reversal)

Construction

• Negative cumulative return over the past 3 months; normalized and standardized.

Interpretation

• Captures mean reversion at short horizons (liquidity shocks, profit-taking, crowded unwind). Positive exposure = contrarian tilt; negative = chasing recent winners. Useful gauge of sensitivity to short-lived reversals.
  
  

2.4 LTMOM (12–1 Momentum)

Construction

• Cumulative return over prior 12 months excluding the most recent month (12–1); normalized and standardized.

Interpretation

• Measures performance continuation (underreaction, herding, trend-following flows). Works in trending regimes; can whipsaw in reversals/regime shifts.
  
  

2.5 VALUE

Construction

• Book-to-price; normalized and standardized.

Interpretation

• Separates inexpensive (value) from expensive (growth) names. Value tends to outperform in recoveries/mean-reversion; growth excels in innovation-led expansions. A tilt toward value implies reliance on re-rating.
  
  

2.6 GROWTH

Construction (composite) 

• Inverse 5-yr dividend payout (retention) 
  
  

• Δ capital structure (Δ equity, LT debt, preferred) scaled to the latest book totals 5-yr asset growth 
  
  

• 5-yr EPS growth 
  
  

• 1-yr EPS change. All inputs were normalized and standardized, combined into a single growth score. 

Interpretation

• Signals reinvestment and expansion. Benefits from innovation/structural tailwinds; vulnerable to valuation compression in risk-off or rising-rate regimes. Counterbalances Value in strategic tilts.
  
  

2.7 LOWVOL (Low Volatility)

Construction (composite) 

• Beta × residual return volatility (CAPM)
   

• Daily σ (3 months) 
  
  

• High/low price ratio (1 month)
   

• log(price) 
  
  

• Cumulative monthly range (1 year)
   

• Volume-sensitivity to market volume
   

• Standardize components; combine to a volatility/stability profile.

Interpretation

• Captures the low-risk anomaly. Positive exposure = smoother compounding/defensiveness (may lag sharp rallies). Negative exposure = high-risk/high-reward tilt.
  
  

2.8 LIQUIDITY

Construction (composite)

• Share turnover (1y) 

• Share turnover (quarter, annualized) 

• Share turnover (month) 

• Volume-to-variance ratio 
  Normalized, standardized, combined.

Interpretation

• Measures trading ease and depth. High exposure = liquid, institutionally favored names. Low exposure = potential execution risk (wider spreads, price impact), critical under stress.
  
  

2.9 LEVERAGE

Construction (composite)

• Market leverage: (MV equity + MV preferred + LT debt) / MV equity 
  
  

• Book leverage: (Book equity + Book preferred + LT debt) / Book equity 
  
  

• Debt-to-assets: (ST + LT debt) / Total assets 
  Normalize/standardize; combine.  

Interpretation

• Captures financial structure risk. High exposure = amplified equity variability, sensitivity to credit spreads/refinancing. Low = conservative balance sheets and defensive resilience.
  
  

2.10 EARNYIELD (Earnings Yield)

Construction (composite) 

• Trailing E/P 
  
  

• Five-year average E/P (avg EPS ÷ avg quarter-end price) 
  Normalize/standardize; combine.

Interpretation

• Valuation relative to profits. High exposure = cheap cash flows (value-like); low = expensive, growth-dependent. Complements Value/Profitability as a valuation anchor.
  
  

2.11 EARNVAR (Earnings Variability)

Construction (composite) 

• Coefficient of variation of earnings (5 years) 
  
  

• Coefficient of variation of cash flows (5 years) (earnings + depreciation + deferred taxes) 
  Normalize/standardize; combine. 

Interpretation

• Measures fundamental stability. High exposure = volatile earnings/cash flows (risk premium, surprise risk). Low = predictable fundamentals (quality tilt).
  
  

2.12 PROFIT (Profitability)

Construction (equal-weighted composite)

• Asset Turnover = Sales / Total Assets
   

• Gross Profitability = (Sales – COGS) / Total Assets 
  
  

• Gross Margin = Gross Profit / Sales 
  
  

• ROA = Earnings / Total Assets 
  Normalize/standardize; combine.  

Interpretation

• Captures operating efficiency/quality. High exposure = strong margins, competitive advantage, resilience. Low = weaker fundamentals (riskier cyclicals, distress).

3) Industry Factors (26)

Construction

• Each stock has loading = 1 to exactly one primary industry (0 to all others). Daily industry returns are mean-centred (sum-to-zero) to represent relative performance vs the market.

Interpretation

• Industry factors isolate sector-level drivers (demand cycles, input costs, regulation, technology). Tilts reflect thematic/cyclical positioning; neutralization enables clean style analysis.

Industry list (construction + interpretation shorthand): 

• AERODEF — Aerospace & Defence 
  Construction: Companies classified in Aerospace & Defence. 
  Interpretation: Exposure to defence budgets, aero cycles, geopolitical risk.
   

• AUTOCOMP — Auto Components 
  Construction: Auto component manufacturers. 
  Interpretation: Supplier cycles tied to OEM volumes and costs. 
  
  

• AUTOMOBL — Automobiles 
  Construction: Vehicle OEMs. 
  Interpretation: Consumer demand, credit cycles, commodity inputs. 
  
  

• BANKS — Banks 
  Construction: Deposit-taking and lending institutions. 
  Interpretation: Interest rates, credit quality, and regulation. 
  
  

• BUSINSERV — Commercial Services & Supplies; Professional Services 
  Construction: Listed under those industries. 
  Interpretation: Business cycle, outsourcing intensity, and utilization. 
  
  

• CAPGOODS — Electrical Equipment; Construction & Engineering; Machinery; Building Products; Industrial Conglomerates 
  Construction: As classified above. 
  Interpretation: Industrial activity, capex cycles, infra spend. 
  
  

  CHEMICALS — Chemicals 
  Construction: Chemical producers. 
  Interpretation: Feedstock prices, global demand, and regulation. 
  
  

• CONSUMDISC — Discretionary (Textiles/Apparel, Media, Hotels/Restaurants/Leisure, Entertainment, Specialty Retail, Diversified Consumer Services, Leisure Products, Broadline Retail, Interactive Media & Services) 
  Construction: All listed subsectors above. 
  Interpretation: Discretionary spend, confidence, lifestyle trends. 
  
  

• CONSUMDUR — Household Durables 
  Construction: Durable goods manufacturers. 
  Interpretation: Housing/consumer durable cycles. 
  
  

• CONSUMSTAP — Staples (Distribution & Retail, Food, Personal Care, Tobacco, Beverages, Household Products) 
  Construction: All staples subsectors. 
  Interpretation: Defensive demand, input costs, regulation. 
  
  

• FINLSERV — Consumer Finance; Capital Markets; Financial Services; Insurance 
  Construction: As classified above. 
  Interpretation: Financial intermediation, market cycles, claims. 
  
  

• HEALTHCARE — Providers & Services; Life Sciences Tools & Services; Equipment & Supplies; Health Care Tech 
  Construction: All health care subsectors listed. 
  Interpretation: Demographics, innovation, policy. 
  
  

• ITSERVIC — IT Services 
  Construction: IT consulting, outsourcing, services. 
  Interpretation: Global IT spend, wage cycles, FX. 
  
  

• MATERIALS — Containers & Packaging; Paper & Forest; Construction Materials 
  Construction: As above. 
  Interpretation: Industrial demand, commodity cycles. 
  
  

• METMINING — Metals & Mining 
  Construction: Metal/mining producers. 
  Interpretation: Global commodity prices, trade, and capex.
   

• OILGAS — Oil, Gas & Consumable Fuels; Energy Equipment & Services 
  Construction: E&P, services, fuels. 
  Interpretation: Energy prices, geopolitics, and drilling activity. 
  
  

• PHARMA — Pharmaceuticals; Biotechnology 
  Construction: Pharma & biotech issuers. 
  Interpretation: Pipelines, IP/patents, regulation. 
  
  

• POWERGEN — Independent Power & Renewable Electricity Producers 
  Construction: IPPs & renewable power firms. 
  Interpretation: Fuel costs, demand, policy/incentives. 
  
  

• REALESTATE — Real Estate Management & Development 
  Construction: RE development/management. 
  Interpretation: Property cycles, financing, urbanization. 
  
  

• SOFTWARE — Software 
  Construction: Application/system software firms. 
  Interpretation: Enterprise spend, SaaS adoption, innovation. 
  
  

• TECHCOMP — Communications Equipment; Electronic Equipment, Instruments & Components; Semiconductors & Semi Equipment; Tech Hardware/Storage/Peripherals 
  Construction: All tech hardware & component subsectors. 
  Interpretation: Tech capex cycles, innovation, supply chains. 
  
  

• TELECOM — Diversified & Wireless Telecommunication Services 
  Construction: Telco operators. 
  Interpretation: ARPU, spectrum/regulation, competition. 
  
  

• TRADDIST — Trading Companies & Distributors; Distributors 
  Construction: Distribution/wholesale firms. 
  Interpretation: Volume leverage, pricing power, supply chains. 
  
  

• TRANSPORT — Transport Infrastructure; Passenger Airlines; Marine Transportation; Air Freight & Logistics; Ground Transportation 
  Construction: All transport subsectors. 
  Interpretation: Trade flows, fuel costs, macro cycles. 
  
  

• UTILITIES — Electric, Gas, Water Utilities 
  Construction: Regulated utility operators. 
  Interpretation: Yield sensitivity, regulation, fuel mix. 
  
  

• MISCELLAN — All others 
  Construction: Residual classifications not mapped above. 
  Interpretation: Catch-all for niche categories; revisit periodically. 
  
  

Glossary

• Active Risk (Tracking Error) — The standard deviation of a portfolio’s returns relative to its benchmark; measures how much the portfolio’s performance is expected to deviate from the index due to active bets. 

• Asset Turnover — Sales divided by total assets; a profitability/efficiency descriptor indicating how productively assets generate revenue. 

• Beta (CAPM Beta) — Sensitivity of a stock’s return to market returns (slope from a regression of stock on market). >1 = more volatile than market; <1 = more defensive. 

• Bid–Ask Spread — The difference between the best price to buy and sell; a primary transaction cost and proxy for liquidity. 

• Book-to-Price (B/P) — Book value of equity divided by price; a valuation descriptor used in Value factor construction (higher = cheaper). 

• Composite (of descriptors) — A factor built from multiple inputs (descriptors) combined (often equally or with set weights) after standardization. 

• Corporate Actions — Events such as splits, dividends, rights, mergers, must be handled point-in-time to avoid look-ahead bias in returns/descriptors. 

• Cross-Sectional Regression — Daily regression of stock returns on exposures (Market unit, Style continuous, Industry dummies) to estimate factor returns and residuals. 

• Deduplication (Listings) — Consolidating dual-listed names across exchanges (BSE/NSE) into a single unique issuer to avoid double-counting in Coverage. 

• Descriptor — A measurable input used to construct factor exposures (e.g., 12–1 return for Momentum, B/P for Value). Cleaned, winsorized, and z-scored before combining. 

• Earnings Yield (E/P) — Earnings divided by price; valuation anchor complementary to Book-to-Price (higher = cheaper). 

• Earnings Variability (CV) — Coefficient of variation of earnings (and cash flows): standard deviation divided by mean over a period; gauges fundamental stability. 

• Estimation Universe — The screened subset of the Coverage Universe (liquidity/data quality) used for factor/FCM estimation. Approximately 25% of Coverage in INEC-1. 

• Exposure (Loading) — A stock’s sensitivity to a factor (e.g., 1.2 to Beta; 1 to its Industry). Used with factor returns to explain/forecast returns and risk. 

• Factor — A common driver of returns shared by many stocks (Market, Style, or Industry), distinct from stock-specific (idiosyncratic) effects. 

• Factor Covariance Matrix (FCM) — Covariances among factor returns; combined with exposures to compute factor risk contribution to portfolio variance. 

• Factor Return — The daily return attributed to a factor, estimated from the cross-sectional regression of stock returns on exposures. 

• GLS (Generalized Least Squares) Weighting — A regression approach that weights observations (e.g., by liquidity or specific risk) to improve factor return estimates. 

• Growth (Factor) — Composite reflecting reinvestment and expansion (retention, Δ capital structure, asset/EPS growth, earnings change). 

• Idiosyncratic / Specific Risk — The portion of a stock’s variability not explained by common factors; treated as uncorrelated across names. 

• Industry Dummy (One-Hot) — Binary indicator (1/0) assigning each stock to exactly one industry factor. 

• Information Ratio (IR) — Active return divided by tracking error; a measure of risk-adjusted active performance (used in evaluation, not in factor construction). 

• IPO Cooling-Off Window — Period after listing during which names may be excluded from estimation to avoid unstable exposures/returns. 

• Leverage (Market/Book) — Measures of debt reliance: market leverage (MV equity + preferred + LT debt) / MV equity; book leverage analogous using book values. 

• Liquidity (Factor) — Composite of turnover at multiple horizons and volume-to-variance; proxies trading ease and price impact risk. 

• LowVol (Low Volatility Factor) — Composite of volatility descriptors (residual σ, daily σ, ranges, price level, volume-beta); a defensiveness proxy. 

• Market Factor — The baseline systematic driver; each stock’s exposure = 1 by construction in INEC-1. 

• Momentum 12–1 (LTMOM) — Cumulative 12-month return excluding the most recent month (to avoid short-term reversal); a continuation descriptor. 

• Out-of-Sample (OOS) Test — Validating model components on unseen periods to prevent overfitting/data-mining. 

• Point-in-Time (PIT) Data — Data recorded as known on the date, preventing look-ahead bias (e.g., fundamentals with reporting lags handled correctly). 

• Portfolio Beta — Weighted sum of stock betas; indicates sensitivity of the portfolio to market moves. 

• Positive-Definite (PD) — Property of covariance matrices required to compute valid portfolio variances (no negative variances). 

• Profit (Profitability Factor) — Composite of asset turnover, gross profitability, gross margin, ROA; a quality dimension. 

• Regression Residual — The stock-specific return left after removing Market, Style, and Industry contributions on the regression day. 

• Shrinkage — A Statistical technique that blends sample covariances with a structured target (e.g., identity) to improve stability/PD of the FCM. 

• Short-Term Reversal (STREV) — Negative of recent 3-month return; captures mean reversion from flows/crowding. 

• Size (Factor) — –ln(market cap); higher exposure = smaller firms. 

• Sum-to-Zero (Industry Returns) — Constraint forcing the cross-sectional mean of industry factor returns to zero each day so industries reflect relative performance vs market. 

• Turnover (Shares or Value) — Trading activity over a period (e.g., 1m/1q/1y); higher turnover generally implies better liquidity. 

• Value (Factor) — Book-to-Price-based valuation exposure (higher = cheaper). 

• Volume-to-Variance Ratio — Liquidity descriptor comparing trading volume with return variance; higher suggests deeper markets for a given volatility. 

• Winsorization — Capping extreme descriptor values at selected percentiles to reduce outlier influence before standardization. 

• Z-Score (Standardization) — Subtract the cross-sectional mean and divide by the standard deviation to place descriptors on a comparable scale each day. 

• 12–1 Construction (Momentum) — Excludes the most recent month in the 12-month lookback to prevent contamination from short-term reversal effects.