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Risk attribution and portfolio performance measurement: An overview

By Yongli Zhang and Svetlozar Rachev


A major problem associated with risk management is that it is very hard to identify the main resource of risk taken, especially in a large and complex portfolio. This is due to the fact that the risk of individual securities in the portfolio, measured by most of the widely used risk measures such as standard deviation and value-at-risk, don’t sum up to the total risk of the portfolio. Although the risk measure of beta in the Capital Asset Pricing Model seems to survive this major de…ciency, it su¤ers too much from other pitfalls to become a satisfactory solution. Risk attribution is a methodology to decompose the total risk of a portfolio into smaller terms. It can be applied to any positive homogeneous risk measures, even free of models. The problem is solved in a way that the smaller decomposed units of the total risk are interpreted as the risk contribution of the corresponding subsets of the portfolio. We present here an overview of the methodology of risk attribution, di¤erent risk measures and their properties. S. Rachev’s research was supported by grants from Division of Mathematical, Lif

Topics: Barbara and the Deutschen Forschungsgemeinschaft
Year: 2004
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