BIRR model

There are 5 factors of the BIRR model.

  1. Time horizon Risk

  2. Confidence Risk

  3. Business cycle risk

  4. Market timing risk

  5. Inflation risk

Alongside with these factors are the sensitivity factor.

For example, if an investor is unexpectedly very willing to invest long term, will the sensitivity factor of the time horizon be negative or positive?

If inflation is unexpectedly very high, will the sensitivity factor of inflation be negative or positive?

Thank you!

Any help here? :frowning:

The sensitivity factors do not change for a given portfolio or stock. The variables - time horizion, inflation, etc. vary. So if inflation is very high, that very high number will be multiplied by the inflation sensitifity factor. If inflation is low, a low number will be multipied by the SAME inflation sensitivity factor to arrive at the impact inflation has on the stock or portfolio.

Thanks NeverQuit! I mean how is the sensitivity factor derived in the first place? When is it negative or positive?

Sensitivity factors vary by portfolio and individual stock. How exactly they are derived, I do not know. However, you can assume the folks deriving them are competent to do so. the important thing to keep in mind is there isn’t a one size fits all. I assume the inflation sensitivity factor is much higher for the precious metals industry than other industries given the strong correlation between inflation and precious metals such as gold. conversly business cycle factors presumably are higher for the auto and housing industry given their correlation with consumer spending.