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Portfolio Selection and Risk Sharing via Risk Budgeting

Asimit, V. ORCID: 0000-0002-7706-0066, Chong, W. F., Tunaru, R. & Zhou, F. Portfolio Selection and Risk Sharing via Risk Budgeting.


Risk budgeting is an effective risk management that a decision-maker uses to create a risk portfolio with a pre-determined risk profile. This paper provides a rich discussion about the theory and practice on how to construct risk budgeting portfolios in variety of settings. We revisit the usual portfolio selection setting with and without clustered risk budgeting targets, and we then provide a novel approach on how to extend the usual setting to situations in which a non-hedgeable risk is present or fixed sub-portfolios are aimed by the decision-maker. Another novel approach of this paper is how to include risk budgeting targets in the process of risk sharing, which has not been discussed in the literature. Implementation issues are also discussed, and some bespoke algorithms are provided to identify such risk budgeting portfolios. Numerical experiments are performed for real-life financial and insurance data, and we explain the risk mitigation effect of our proposed portfolio. Specifically, financial risk budgeting portfolios with social responsibility targets are constructed, while insurance risk budgeting portfolios are obtained in an intra-group risk sharing setting.

Publication Type: Other (Preprint)
Additional Information: Copyright the authors, 2023.
Publisher Keywords: Risk management, Portfolio selection, Risk budgeting/parity, Risk sharing
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HF Commerce
Departments: Bayes Business School > Actuarial Science & Insurance
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