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Risk Budgeting: Portfolio Problem Solving with Value-at-Risk

Risk Budgeting: Portfolio Problem Solving with Value-at-Risk

Neil D. Pearson

ISBN: 978-1-118-16083-1

Aug 2011

336 pages

$81.99

Description

Covers the hottest topic in investment for multitrillion pension market and institutional investors
Institutional investors and fund managers understand they must take risks to generate superior investment returns, but the question is how much. Enter the concept of risk budgeting, using quantitative risks measurements, including VaR, to solve the problem. VaR, or value at risk, is a concept first introduced by bank dealers to establish parameters for their market short-term risk exposure. This book introduces VaR, extreme VaR, and stress-testing risk measurement techniques to major institutional investors, and shows them how they can implement formal risk budgeting to more efficiently manage their investment portfolios. Risk Budgeting is the most sophisticated and advanced read on the subject out there in the market.
PART ONE: INTRODUCTION.

What are Value-at-Risk and Risk Budgeting?

Value-at-Risk of a Simple Equity Portfolio.

PART TWO: TECHNIQUES OF VALUE-AT-RISK AND STRESS TESTING.

The Delta-Normal Method.

Historical Simulation.

The Delta-Normal Method for a Fixed Income Portfolio.

Monte Carlo Simulation.

Using Factor Models to Compute the VaR of Equity Portfolios.

Using Principal Components to Compute the VaR of Fixed-Income Portfolios.

Stress Testing.

PART THREE: RISK DECOMPOSITION AND RISK BUDGETING.

Decomposing Risk.

A "Long-Short" Hedge Fund Manager.

Aggregating and Decomposing the Risks of Large Portfolios.

Risk Budgeting and the Choice of Active Managers.

PART FOUR: REFINEMENTS OF THE BASIC METHODS.

Delta-Gamma Approaches.

Variants of the Monte Carlo Approach.

Extreme Value Theory and VaR.

PAART FIVE: LIMITATIONS OF VALUE-AT-RISK.

VaR Is Only an Estimate.

Gaming the VaR.

Coherent Risk Measures.

PART SIX: CONCLUSION.

A Few Issues in Risk Budgeting.

References.

Index.