Do you know where the risk in your portfolio is coming from? Well, of course, you do. After all, you designed the portfolio and so the asset weights reflect the risk contribution. A 50% weighting in stocks translates into a 50% contribution to risk for the portfolio overall, right? That’s a reasonable first approximation, but it’s a crude estimate and one that’s prone to error as market conditions change—particularly for a strategy that holds a mix of asset classes. For a precise profile of the relative contributions from each piece of the portfolio—an essential piece of intelligence for risk management—we’ll have to go deeper into the analytical toolkit.
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