Risk Budgeting Using Expected Shortfall (CVaR)

9 Pages Posted: 24 Jun 2008 Last revised: 26 Aug 2015

Date Written: June 24, 2008


This paper provides an overview of using Expected Shortfall (CVaR) for risk budgeting. It is argued that for strategies exhibiting fat tails, portfolio construction and allocation decisions are best formulated with CVaR as the risk measure. Furthermore, the level of unincumbered cash for a hedge fund should be determined based on a longer horizon CVaR calculation. Trade attractiveness evaluated based on CVaR leads to better decision making by penalizing trades that have large loss potential.

Keywords: CVaR, Risk Budgeting, Expected Shortfall, ETL, Fat Tails

Suggested Citation

Mazaheri, Mohsen, Risk Budgeting Using Expected Shortfall (CVaR) (June 24, 2008). Available at SSRN: https://ssrn.com/abstract=1150929 or http://dx.doi.org/10.2139/ssrn.1150929

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