Bruder, Benjamin and Roncalli, Thierry (2012): Managing risk exposures using the risk budgeting approach.
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Abstract
The ongoing economic crisis has profoundly changed the industry of the asset management, by putting risk management at the heart of most investment processes. This new riskbased investment style does not rely on returns forecasts and is therefore assumed to be more robust. In 2011, it has particularly encountered a great success with the achievement of minimum variance, ERC and risk parity strategies in portfolios of several large institutional investors. These portfolio constructions are special cases of a more general class of allocation models, known as the risk budgeting approach. In a risk budgeting portfolio, the risk contribution from each component is equal to the budget of risk defined by the portfolio manager. Unfortunately, even if risk budgeting techniques are widely used by market practitioners, they are few results about the behavior of such portfolios in the academic literature. In this paper, we derive the theoretical properties of the risk budgeting portfolio and show that its volatility is located between those of minimum variance and weight budgeting portfolios. We also discuss the existence, uniqueness and optimality of such a portfolio. In a second part of the paper, we propose several applications of risk budgeting techniques for riskbased allocation, like risk parity funds and strategic asset allocation, and equity and bond alternative indexations.
Item Type:  MPRA Paper 

Original Title:  Managing risk exposures using the risk budgeting approach 
Language:  English 
Keywords:  Risk budgeting, risk management, riskbased allocation, equal risk contribution, diversification, concentration, risk parity, alternative indexation, strategic asset allocation 
Subjects:  G  Financial Economics > G1  General Financial Markets > G11  Portfolio Choice; Investment Decisions C  Mathematical and Quantitative Methods > C6  Mathematical Methods; Programming Models; Mathematical and Simulation Modeling > C60  General 
Item ID:  37246 
Depositing User:  Thierry Roncalli 
Date Deposited:  10. Mar 2012 14:35 
Last Modified:  12. Feb 2013 11:05 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/37246 
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