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Printable Handouts
Navigable Slide Index
- Introduction
- Intro to risk decomposition
- Risk decomposition by factors
- Risk attribution by factors
- Risk decomposition by holdings
- A sneak peek ahead
- The simplest possible example
- Portfolio holdings data
- Absolute volatilities and correlations
- The absolute covariance matrix!
- The algebra of risk decomposition
- Actual risk contribution simplified
- Percentage risk contribution
- The nitty gritty calculation details
- Absolute risk decomposition
- Contributions from groups of holdings
- Marginal contribution to variance
- Marginal contribution to risk (S.D.) - Formulas
- Marginal contribution to risk - data
- Summary of absolute decomposition
- Tracking error decomposition
- Here is the important bit !!
- Three definitions of tracking error
- Three versions of tracking error
- Relative volatilities and correlations
- The relative covariance matrix
- TED-1, relative weights & absolute covariances
- TED-2, absolute weights & relative covariances
- TED-3, relative weights and relative covariances
- Comments on TE decompositions
- Marginal contributions to TE - 1
- Marginal contributions to TE - 2 & 3
- Marg.cont. to TE using absolute covariance matrix
- Marg.cont. to TE using relative covariance matrix
- Comment on marginal contributions
- Analysis of risk decomposition
- Conclusions
Topics Covered
- The standard method of decomposing portfolio risk into contributions from individual assets
- 'Risk budgeting' by pension funds
- Unfortunately, while this analysis gives a unique answer for absolute risk, it gives three very different answers for tracking error, or risk relative to some benchmark (such as the pension fund's liabilities)
- Description of what is happening
- Analysis used by most practitioners does not give the most useful answer
Talk Citation
MacQueen, J. (2007, October 1). Risk decomposition (and risk budgeting) [Video file]. In The Business & Management Collection, Henry Stewart Talks. Retrieved November 13, 2024, from https://doi.org/10.69645/YKIS3274.Export Citation (RIS)