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1. Introduction
2. Intro to risk decomposition
3. Risk decomposition by factors
4. Risk attribution by factors
5. Risk decomposition by holdings
6. A sneak peek ahead
7. The simplest possible example
8. Portfolio holdings data
9. Absolute volatilities and correlations
10. The absolute covariance matrix!
11. The algebra of risk decomposition
12. Actual risk contribution simplified
13. Percentage risk contribution
14. The nitty gritty calculation details
15. Absolute risk decomposition
16. Contributions from groups of holdings
17. Marginal contribution to variance
18. Marginal contribution to risk (S.D.) - Formulas
19. Marginal contribution to risk - data
20. Summary of absolute decomposition
21. Tracking error decomposition
22. Here is the important bit !!
23. Three definitions of tracking error
24. Three versions of tracking error
25. Relative volatilities and correlations
26. The relative covariance matrix
27. TED-1, relative weights & absolute covariances
28. TED-2, absolute weights & relative covariances
29. TED-3, relative weights and relative covariances
30. Comments on TE decompositions
31. Marginal contributions to TE - 1
32. Marginal contributions to TE - 2 & 3
33. Marg.cont. to TE using absolute covariance matrix
34. Marg.cont. to TE using relative covariance matrix
35. Comment on marginal contributions
36. Analysis of risk decomposition
37. 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

Links

Series:

• Quantitative Financial Risk Management

Categories:

• Finance, Accounting & Economics

Talk Citation

Publication History

• Published on October 1, 2007
• Archived on April 4, 2022