Idiosyncratic risk (IDIORISK): calculated by LN (1-r2)/r2. Ferreira and Laux (JF,2007) used this relationship to analyze of governance to idiosyncratic risk, specifically board independence and stock price informativeness. By definition, this variable is independent of the market. Ang, Hodrick, Xing and Zhang (2008) find negative association between average return and idiosyncratic volatility.
Bêta: systematic risk of the firm calculated using daily stock over period t. It would be associated negatively with rating. Studies show that firm size has effects on crosssectional returns in particular with book-to-market.
Book-to-market (MTB): ratio of book to market value of equity calculated similar to the Fama and French (1992)’s procedure. Firm with high ratio could be associated with high risk and negative rating.
Author: Paul Klumpes
Source: EDHEC-Risk Institute
The Risk Analyst 