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Risk budgeting portfolios from simulations

Author

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  • da Costa, B. Freitas Paulo
  • Pesenti, Silvana M.
  • Targino, Rodrigo S.

Abstract

Risk budgeting is a portfolio strategy where each asset contributes a prespecified amount to the aggregate risk of the portfolio. In this work, we propose an efficient numerical framework that uses only simulations of returns for estimating risk budgeting portfolios. Besides a general cutting planes algorithm for determining the weights of risk budgeting portfolios for arbitrary coherent distortion risk measures, we provide a specialised version for the Expected Shortfall, and a tailored Stochastic Gradient Descent (SGD) algorithm, also for the Expected Shortfall. We compare our algorithm to standard convex optimisation solvers and illustrate different risk budgeting portfolios, constructed using an especially designed Julia package, on real financial data and compare it to classical portfolio strategies.

Suggested Citation

  • da Costa, B. Freitas Paulo & Pesenti, Silvana M. & Targino, Rodrigo S., 2023. "Risk budgeting portfolios from simulations," European Journal of Operational Research, Elsevier, vol. 311(3), pages 1040-1056.
    • Handle: RePEc:eee:ejores:v:311:y:2023:i:3:p:1040-1056
    DOI: 10.1016/j.ejor.2023.06.003
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