Optimal Allocation of Diversification Benefits
University of Amsterdam; Netspar; Eureko/Achmea
January 9, 2011
In recent years within Insurance companies measures like RAROC (Risk Adjusted Return on Capital) have become more popular for Balance Sheet Management purposes. RAROC is a performance measure that quantifies the amount of return per unit of risk that can be obtained by a certain entity.
Measures like RAROC are often used by a holding company to base investment or risk budgeting decisions on. It is believed that when one increases the investments in or the risk budget of an entity with a high RAROC the risk vs. return profile of the holding company improves. Whether this is actually the case depends on the characteristics of the risks of the subsidiaries of the holding company and the design of the RAROC measure. This paper discusses how the RAROC measure should be designed in order to give the optimal incentives.
Number of Pages in PDF File: 10
Keywords: Diversification, Risk Budgeting, Capital Budgeting, RAROC, RORAC, Economic Capital, Portfolio Optimisation, Value at Risk, Solvency II
JEL Classification: G11, G22working papers series
Date posted: January 12, 2011
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo1 in 2.625 seconds