Risk allocation under shortfall constraints

Jan Bertus Molenkamp
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Jan Bertus Molenkamp: Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics

No 9, Serie Research Memoranda from VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics

Abstract: Risk budgeting interpreted as efficient portfolio allocation is often based on expected outperformance, alpha or information ratio. Once these crucial parameters have been estimated, they are being treated as fixed. In this paper we develop some sense, both theoretical and practical, on the magnitude of the uncertainty and present a method to cape with uncertainty of the expected active returns. We will use examples to demonstrate the impact of the uncertainty. The developed model is widely applicable and can be used to make an optimal risk allocation on different levels of investment strategy (as set allocation, styles, managers, etc.).

Keywords: Risk budgeting; Information ratio; Tracking error; Volatility (search for similar items in EconPapers)
JEL-codes: D82 G31 (search for similar items in EconPapers)
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:vua:wpaper:2003-9

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