Risk Budgeting

Risk budgeting is a process by which financial organizations and investment managers determine where risks should be taken and how the risks can be most effectively allocated across the organization. It establishes objectives for specific individuals and groups as well as the entire organization. Then the limits are carefully measured, monitored and managed.

Risk budgeting allows profits for different business units to be compared in proportion to the amount of capital that they employed and the risks they took to achieve the profits. In organizations that hire outside investment managers, risk budgeting can help them allocate funds among the various managers.

Since certain risks tend to offset each other (offering diversification) the total risk budget for a firm will typically exceed the sum of the risk budgets assigned to individual business units.

For more information, see all articles on: Asset Allocation, Risk Management

See also:
  • Extensions and Supplements to Value at Risk (VaR)
  • Forming an Investment Risk Objective
  • Enterprise Risk Management
  • Using Derivatives to Hedge Different Types of Credit Risk
  • Investment Objectives
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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