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First assume you have been given/you know the shocks scenarios. Ideally you would have these scenarios in term of shifts/movements- e.g., curve shifts by $a+bT$. So what I would do is to price the products using the current market interest rate data. Then apply the shifts to the curve and then re-price the products. The change in price is the main object of ...


If the information from a 3rd factor can be derived from the information in the other 2 factors, then the 3rd factor is redundant and is not necessary. But as others have commented, probably not a great risk model. If one is uncomfortable with the risk in those sectors, it might be best to use a filter to screen those industries out of your portfolio.


Let us start with some underlying math. First, $\sigma=\sqrt{\sigma^2}$, but the minimum variance unbiased estimator (MVUE) for standard deviation is not the square root of the MVUE of the variance, $\hat{\sigma}\ne\sqrt{\hat{\sigma^2}}.$ Taking the square root of the unbiased sample estimator of the variance introduces bias because it is a non-linear ...

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