Asset Allocation with Conditional Value-at-Risk Budgets
Free University of Brussels (VUB); VU University Amsterdam
William Blair & Co.; Guidance Capital Management
Brian G. Peterson
May 24, 2012
Journal of Risk 15 (3), Spring 39-68
Risk budgets are frequently used to estimate and allocate the risk of a portfolio by decomposing the total portfolio risk into the risk contribution of each component position. Many approaches to portfolio allocation use ex post methods for constructing risk budgets and take the variance as a risk measure. In this paper, however, we use ex ante methods to evaluate the component contribution to Conditional Value at Risk (CVaR) and to allocate risk. The proposed minimum CVaR concentration portfolio draws a balance between the investor's return objectives and the diversification of risk across the portfolio. For a portfolio invested in bonds, commodities, equities, and real estate, we show that the minimum CVaR concentration portfolio offers an attractive compromise between the good risk-adjusted return properties of the minimum CVaR portfolio and the positive return potential and low portfolio turnover of an equal-weighted portfolio.
Number of Pages in PDF File: 36
Keywords: Asset Allocation, CVaR, Risk budgetsAccepted Paper Series
Date posted: July 16, 2011 ; Last revised: August 30, 2013
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