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The Journal of Portfolio Management

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Risk Contribution Is Exposure Times Volatility Times Correlation: Decomposing Risk Using the X-Sigma-Rho Formula

Jose Menchero and Ben Davis
The Journal of Portfolio Management Winter 2011, 37 (2) 97-106; DOI: https://doi.org/10.3905/jpm.2011.37.2.097
Jose Menchero
is an executive director at MSCI Barra in Berkeley, CA.
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  • For correspondence: jose.menchero@mscibarra.com
Ben Davis
is a vice president at MSCI Barra in Berkeley, CA.
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  • For correspondence: benjamin.l.davis@mscibarra.com
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Abstract

Menchero and Davis present a flexible and general framework for attributing portfolio risk to the same decision variables used to attribute portfolio return. For each return source, the authors decompose the risk contribution into a product of exposure, volatility, and correlation. Their method is a generalization of the marginal contribution to risk approach. In addition to providing a highly intuitive risk attribution, the authors’ approach also allows drilldown capability into the volatility and the correlation, thus providing even greater insight into the sources of portfolio risk.

TOPICS: Risk management, portfolio theory, factor-based models

  • © 2011 Pageant Media Ltd
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The Journal of Portfolio Management: 37 (2)
The Journal of Portfolio Management
Vol. 37, Issue 2
Winter 2011
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Risk Contribution Is Exposure Times Volatility Times Correlation: Decomposing Risk Using the X-Sigma-Rho Formula
Jose Menchero, Ben Davis
The Journal of Portfolio Management Jan 2011, 37 (2) 97-106; DOI: 10.3905/jpm.2011.37.2.097

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Risk Contribution Is Exposure Times Volatility Times Correlation: Decomposing Risk Using the X-Sigma-Rho Formula
Jose Menchero, Ben Davis
The Journal of Portfolio Management Jan 2011, 37 (2) 97-106; DOI: 10.3905/jpm.2011.37.2.097
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Jump to section

  • Article
    • Abstract
    • THE X-SIGMA-RHO FRAMEWORK
    • VOLATILITY DRILLDOWN
    • CORRELATION DRILLDOWN
    • RISK CONTRIBUTION DRILLDOWN
    • EXAMPLE
    • CONCLUSION
    • Appendix
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF

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