On the Financial Interpretation of Risk Contribution: Risk Budgets Do Add Up

Qian, Edward E.

doi:10.2139/ssrn.684221

Cited by 99 publications

(69 citation statements)

References 10 publications

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“…Another reason might be the fat tail of the return of the stock, which is inconsistent with the normal distributed assumption. The predicted and realized standard deviations (p_std, r_std) of the percentage contribution are also presented in table 1 that is s , 1,2 proved by Qian (2006). On average, they are quite close.…”

Section: B Numeric Analysismentioning

confidence: 78%

“…In another word, risk contribution perfectly depicts the loss contribution for optimized mean-variance portfolio. Based on the above fact, Qian (2006) concluded that the volatility decomposition can be financially interpreted by loss contribution. However, as far as the author considered, this conclusion is not very convincing: foremost, except the case when μ μ 0, chances are limited for other two cases in practice, which is also admitted by Qian (2006); In addition, although the case μ μ 0 is common, it does not apply to mid-term and long-term horizon.…”

Section: A Risk Contribution and Loss Contributionmentioning

confidence: 99%

“…Based on the above fact, Qian (2006) concluded that the volatility decomposition can be financially interpreted by loss contribution. However, as far as the author considered, this conclusion is not very convincing: foremost, except the case when μ μ 0, chances are limited for other two cases in practice, which is also admitted by Qian (2006); In addition, although the case μ μ 0 is common, it does not apply to mid-term and long-term horizon. So the author provides another more generalized case: p ω μ p ω μ is relatively small to downside portfolio return r. This is almost true because p , w , μ are usually small than one if short sell is not allowed, so their product can be small.…”

Section: A Risk Contribution and Loss Contributionmentioning

confidence: 99%

“…To put it in another way, researchers wonder whether each decomposed component has a sound financial interpretation. Qian (2006) has arrived at the financial interpretation of risk decomposition by building a relationship between loss contribution and percentage risk contribution in terms of volatility and VaR. He further performed an empirical analysis of a balanced portfolio and concluded that risk contribution in terms of volatility and VaR can be interpreted as expected contribution to potential downside return of the portfolio.…”

Section: Iintroductionmentioning

confidence: 99%

See 3 more Smart Citations

Financial Interpretation of Risk Decomposition

Zou¹

2013

Proceedings of the 2nd International Conference on Science and Social Research

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Abstract-Risk decomposition is very significant for portfolio risk allocation as well as risk monitoring. However, the validity of risk decomposition has long been questioned because it does not have a solid financial interpretation. This paper summarizes and modifies the financial interpretation of risk decomposition in terms of standard deviation, value at risk (VaR) and expected shortfall (ES) from references and performs empirical analysis of each risk measure. The conclusion is that all the risk decomposition in terms of standard deviation, VaR and ES can be interpreted by the corresponding loss contribution.

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Section: B Numeric Analysismentioning

confidence: 78%

Section: A Risk Contribution and Loss Contributionmentioning

confidence: 99%

Section: A Risk Contribution and Loss Contributionmentioning

confidence: 99%

Section: Iintroductionmentioning

confidence: 99%

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Financial Interpretation of Risk Decomposition

Zou¹

2013

Proceedings of the 2nd International Conference on Science and Social Research

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“…The risk parity [8][9] model is an investment strategy that combines portfolio of long-term benefits with risk control. The model's approach to balance the risk exposure of portfolio is derived from the "all-weather" portfolio of the Bridge Water Fund in the 1960s: when the medium-long-term macroeconomic environment is exacerbated or weakened by inflationary pressures, and economic growth is higher or lower than expected State and cannot be predicted, the equivalent of four subportfolio can ensure that regardless of the kind of economic environment, at least one sub-fund performance.…”

Section: Risk Parity Modelmentioning

confidence: 99%

A Review of the Research on Asset Allocation Theory

Zhao¹,

Zhou²

2017

Proceedings of the 2017 International Conference on Sports, Arts, Education and Management Engineering (SAEME 2017)

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Abstract. Effective asset allocation is considered the key to successful investment. The research on the theory of asset allocation began in the 1930s. The traditional configuration strategies included 60/40 combination, equal weight combination and mean-variance model. In the 1990s, in order to relax the hypothesis of the strategy, the feasibility of the theory in practice was put forward. A series of asset-based asset allocation strategy based on the GEYR model was proposed. In 21st century, the global economic volatility strengthened, in order to effectively control the risk, to maximize the diversified portfolio, risk-based asset allocation strategy to become the focus of investor attention, risk parity model is one of the typical representatives. At the same time, in addition to the application of quantitative models, investors have begun to pay attention to the impact of the economic cycle, policy cycle and management capabilities, with proud performance of the University Endowment Fund and the operability of the Merrill Lynch clock model to become investors and Use the object.

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Dynamic Risk-Based Asset Allocation

Boudt¹,

Darras

Peeters

2013

Wilmott

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In asset allocation, the equal risk contribution (ERC) approach has rapidly gained popularity: portfolio weights are dynamically set such that the asset classes contribute equally to the portfolio risk. As such, the portfolio loads automatically less on the more risky asset and, by diversifying across asset classes, portfolio drawdowns are reduced. When the equity subportfolio is allocated based on market capitalization weights, the ERC portfolio allocation tends to be dominated by the bond allocation. While the resulting portfolio has a low risk, it is -in today's market regime of low interest rates -also characterized by only moderate expected returns. For this reason, American fund managers have advocated to overlay the ERC portfolio with leverage. Such a leveraged risk-diversified portfolio is commonly referred to as a risk-parity strategy. This paper explores two leverage-free alternatives to increase tactically the equity allocation and preserve a completely risk-based asset allocation approach, which dynamically adjusts to the changing risk regimes. The first one consists of replacing the market capitalization-weighted equity index with a low-risk equity index. The second suggestion to increase the equity allocation is to deviate from an equal risk contribution objective to a 60/40 risk allocation strategy. We show that these two modifications increase significantly the weight of the equity portion in the portfolio, while still keeping the total risk of the dynamically rebalanced portfolios at a low level.

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On the Financial Interpretation of Risk Contribution: Risk Budgets Do Add Up

Cited by 99 publications

References 10 publications

Financial Interpretation of Risk Decomposition

Financial Interpretation of Risk Decomposition

A Review of the Research on Asset Allocation Theory

Dynamic Risk-Based Asset Allocation

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