2024/05/01 by Lars Holden, Holden, Lars · 1 citation
Mathematics · #62 #91 #FOS: Economics and business #FOS: Mathematics #G.3 #Mathematics and Applications #Portfolio Management (q-fin.PM) #Probability (math.PR) #Risk Management (q-fin.RM)
paper · pdf · doi:10.48550/arxiv.2405.00606
openalex publication_date 2024/05/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
The paper discusses capital allocation using the Euler formula and focuses on the risk measures Value-at-Risk (VaR) and Expected shortfall (ES). Some new results connected to this capital allocation is known. Two examples illustrate that capital allocation with VaR is not monotonous which may be surprising since VaR is monotonous. A third example illustrates why the same risk measure should be used in capital allocation as in the evaluation of the total portfolio. We show how simulation may be used in order to estimate the expected Return on risk adjusted capital in the commitment period of an asset. Finally, we show how Markov chain Monte Carlo may be used in the estimation of the capital allocation.