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Risk allocation under shortfall constraints

Author

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  • Molenkamp, Jan Bertus

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

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.).

Suggested Citation

  • Molenkamp, Jan Bertus, 2003. "Risk allocation under shortfall constraints," Serie Research Memoranda 0009, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    • Handle: RePEc:vua:wpaper:2003-9
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    File URL: http://degree.ubvu.vu.nl/repec/vua/wpaper/pdf/20030009.pdf
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    More about this item

    Keywords

    Risk budgeting; Information ratio; Tracking error; Volatility;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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