Exam

Banks on the "sell side" of the investment industry have long used risk budgeting and value at risk (VAR). There is a trend for the "buy side" investment firms to increasingly use VAR. One reason for increased demand for risk budgeting is the increased complexity,

Focus dynamics, and globalization of the investment industry. Use of VAR can help set better guidelines than more traditional limits. By measuring marginal and incremental VARs, a manager can make better decisions concerning portfolio weights.

AIM 75.1: Define risk budgeting.

Risk budgeting is a top-down process that involves choosing and managing exposures to risk. It builds upon value at risk (VAR) measures, is forward-looking, and can apply to asset managers, classes of assets, and individual securities. It is both comprehensive and practical.

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