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Generalized Marginal Risk

Keel, Simon and Ardia, David (2009): Generalized Marginal Risk.

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Abstract

An important aspect of portfolio risk management is the analysis of the overall risk with respect to the allocations to the underlying assets. Marginal risk is the traditional tool used by portfolio managers to accomplish this. However, this metric is only meaningful when a position is levered or when the proceeds of the sale of a position are put in the cash account of the portfolio. This paper proposes an extension of the traditional marginal risk approach as a means of overcoming this deficiency. The new concept, named generalized marginal risk, addresses situations where the change in a position results in changes to other positions as well. For instance, this is the case when there are in- or outows of capital in the portfolio as well as reallocations within the portfolio. A detailed illustration of the new metric is provided for a synthetic portfolio within the elliptical framework and its financial relevance is demonstrated using a portfolio of equities.

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