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

See all articles by Kris Boudt

Kris Boudt

Ghent University; Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Peter Carl

William Blair & Co.; Guidance Capital Management

Brian G. Peterson

University of Washington; University of Illinois at Urbana-Champaign - Department of Finance

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 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)

Ghent University ( email )

Sint-Pietersplein 5
Gent, 9000
Belgium

Vrije Universiteit Brussel ( email )

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

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Peter Carl

Guidance Capital Management ( email )

Chicago, IL
United States

William Blair & Co. ( email )

Chicago, IL 60606

Brian G. Peterson

University of Washington ( email )

Seattle, WA 98195
United States

HOME PAGE: http://https://depts.washington.edu/compfin/about/people/bios/

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,900
Abstract Views
7,023
rank
11,896
PlumX Metrics