Risk budgeting and diversification based on optimised uncorrelated factors

Standard risk budgeting and risk parity use marginal risk contributions to attribute risk to the different instruments in a portfolio. Attilio Meucci, Alberto Santangelo and Romain Deguest introduce an alternative, natural, more general risk decomposition based on ‘minimum-torsion bets’, which uncovers the effective number of uncorrelated bets in a portfolio


In recent years, finance practitioners and academics have witnessed a surge in interest in two different, yet related, areas: risk budgeting, namely the fair attribution of the total risk of an enterprise to its different business lines (see a review and references in Tasche (2008)); and risk parity, namely investment in strategies that contribute equally to the total risk of the portfolio (see a review and references in Roncalli (2013)).


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