PACE Risk Monitor Summary     -1 R*po-l Dafc? ['- : 3", -1301 ForHnFiri v=i ijp llRrj -fi^ 4f 1 f^r, Pi** 1 .,ll B-'.T ,a-"H FaIeji 50 03^ ri= lira OSS K 7= B*Ni"       IITt^(fc;ffa--F -)L.1 T. .3r,r.I TisMTS 4 53'> ai,V) rsTir-v-Ucr,               RiSk DHIMItlBUSIlHlH .H,T " "■■■ |--.r.-i",^.- jfeiTSBsJ t its, Kr T£ 7"ifd. 4 !■ IK'fi'. fis.-!.- "5^4 maaraj .P'J5 -iit; "-.ml ,- W<* 4IW 4T=-'r.             it "!I!S B"J"nAiei ii <£) e:y^lt ^CNinjjiLr; 13 lEud" Tg ; rcrir^ 5;licI'             iUTC WTSLCOfP Sa> fc-.inl i,ki;l iSli-a.ll raih'> i.rtimm f-3 H.ll.'E-iBPOTIW; 'fit "=t i i i ibi |i i ii r 1 IB > 1 II 11 P '5 1 4. I l"f 1 U I -N -JIU - a .1 T - l-Mf-B i r-if r, t - [ . ii 1 u C"_ Ii ISD liill I D 7.14 4;cs J .20 i.45 11-; -1.14 -n m i i-i 0.J5 -LI Aj ■.................................. ■ ■I   ■ej ■ <r           FIGURE 20.4 Risk Decomposition Example tive weight is negative 74 basis points), and it consumes 4.33 percent of the overall risk budget. THE RISK ESTIMATION PROCESS Measuring risk requires that we quantify the future distribution of portfolio20 and constituent returns. In this section we present an eight-step process for the practical implementation of an equity factor risk model. We continue to assume that a portfolio's return can be decomposed into common factor and specific components, and that the distribution of portfolio returns depends on only its mean and variance (i.e., first two moments). In addition, we assume that the factor model is applicable to the U.S. equity market. Hence, the information required to compute risk includes covari-ance matrices, factor exposures, and portfolio holdings (i.e., portfolio weights). The standard deviation of the portfolio return yields the total portfolio risk estimate. Since a portfolio's return is modeled in terms of factor and specific components, we decompose total risk into factor and specific risks. We can further decompose factor risk into investment styles, industries, sectors, and so on. 20In this context, a portfolio return is simply a weighted average of all stock returns in that portfolio. Each stock's weight represents its contribution, in value, to the portfolio.