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Investment management (factors to consider before making tactical asset…
Investment management
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risk budgeting
the process of establishing how much risk should be taken and where it is most efficient to take the risk (in order to maximise return).
two parts
- deciding how to allocate the maximum permitted overall risk between active risk and strategic risk.
- allocating the total active risk budget across the component portfolios (e.g. to the UK equity manager, to the UK bond manager).
An investment style where asset allocations are based on an asset's risk contribution to the portfolio as well as on the asset's expected return.
Strategic risk, structural risk and active risk
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Structural risk
the risk of under-performance if the sum of the individual benchmarks given to fund managers does not add up to the strategic benchmark.
Active risk
the risk of underperformance if the fund managers do not invest exactly in line with the individual benchmarks they are given.
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