Determining and Allocating Diversification Benefits for a Portfolio of Risks
8 Pages Posted: 13 May 2009
Date Written: May, 11 2009
Abstract
A critical problem in risk analysis involving financial variables is the calculation of risk margins. When there are a number of risks, the total risk margin is often reduced to reflect "diversification benefits." How large should the diversification benefit be? And how should the benefit be allocated to the individual risks?. We propose a simple statistical solution. While providing a theoretical analysis, the arrived at expressions are simple to implement in practice. No complex assumptions or simulations are necessarily required.
Keywords: Diversification, Allocated risk margins Stand--alone risk margins, Capital allocation, Euler allocation, Percentile risk aversion
JEL Classification: D81, G12, G22
Suggested Citation: Suggested Citation
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