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Asset Allocation with Conditional Value-at-Risk Budgets

Journal of Risk 15 (3), Spring 39-68

36 Pages Posted: 16 Jul 2011 Last revised: 30 Aug 2013

Kris Boudt

Vrije Universiteit Brussel (VUB); VU University Amsterdam

Peter Carl

William Blair & Co.; Guidance Capital Management

Brian G. Peterson

DV Trading

Date Written: May 24, 2012

Abstract

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.

Keywords: Asset Allocation, CVaR, Risk budgets

Suggested Citation

Boudt, Kris and Carl, Peter and Peterson, Brian G., Asset Allocation with Conditional Value-at-Risk Budgets (May 24, 2012). Journal of Risk 15 (3), Spring 39-68. Available at SSRN: https://ssrn.com/abstract=1885293 or http://dx.doi.org/10.2139/ssrn.1885293

Kris Boudt (Contact Author)

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Peter Carl

William Blair & Co. ( email )

Chicago, IL 60606

Guidance Capital Management ( email )

Chicago, IL
United States

Brian G. Peterson

DV Trading ( email )

216 W. Jackson, Suite 310
Chicago, IL 60605
United States
773-459-4973 (Phone)

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