Fair estimation of capital risk allocation

What is it about?

If you measure the risk of a portfolio you end up with a risk measure. Now you want to distribute this number to the constituents of the portfolio - this is the allocation problem. How to do this in a fair and optimal manner is discussed in our article.

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Why is it important?

The allocation problem is a daily business in banks and all institutions who systematically measure risk on a quantitative scale. Typically, statistical uncertainty is neglected and we show that this leads to serious biases. Improving the estimation methodology helps to avoid these costly problems.