Risk-Based Approaches to Asset Allocation by Maria Debora Braga

Author:Maria Debora Braga
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

Weights (%)

Marginal risk

Risk contribution

Percentage risk contribution (%)

A

20.00

−0.002948

−0.000590

−0.59

B

20.00

0.024125

0.004825

4.81

C

20.00

0.126998

0.025400

25.30

D

20.00

0.166741

0.033348

33.22

E

20.00

0.187061

0.037412

37.26

It is clear that even if the portfolio is perfectly balanced in terms of capital allocation, its risk is mainly driven by asset classes C, D and E while asset class A plays a little hedging effect; asset class B is a minor risk contributor. The equally-weighted portfolio is much more volatile than the optimal risk parity portfolio: 10.04 % standard deviation versus 4.62 %. We observe that, in the particular case of the equally-weighted portfolio, the formula for the portfolio standard deviation () becomes:

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