A Risk Contribution Approach to Asset Allocation”

The aim of this paper is to verify whether efficient portfolios, obtained using traditional tools of asset allocation, provide real diversification of risk, in addition to the division of capital into different asset classes. We will show how portfolios that seem diversified in their capital allocation are too heavily concentrated on in terms of risk allocation. To solve this problem we propose using a risk budgeting approach based on equal marginal contributions to total risk. By using this approach the dispersion of risk is maximized, effectively reducing the intensity and the length of drawdowns and diversifying their source, with equal volatility to a traditional portfolio.