From Asset Allocation to Risk Allocation: The Risk Allocation Framework
Overview
The framework uses multiple dimensions of risk and return trade-offs to consider when building portfolios and evaluates the consequences of risk allocation decisions during normal and stressed markets. The authors explain this process goes further than traditional role-in-portfolio exposure techniques by considering not only the role that different investments might play in the portfolio, but how and in what ways such investments contribute to or mitigate various forms of portfolio risk. The framework combines careful attention to risk allocation in the context of the risk sensitivities and limitations of a long-term investment portfolio (LTIP) given its role in the broader organization.