TITLE

Risk Budgeting: Investment Cruise Control for Your Clients

AUTHOR(S)
Gilkeson, James H.; Michelson, Stuart E.
PUB. DATE
November 2005
SOURCE
Journal of Financial Planning;Nov2005, Vol. 18 Issue 11, p64
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
Risk budgeting is a process, recently adopted by many institutional investors, that limits the extent to which a portfolio can deviate from a benchmark in order to maximize expected alpha while not exceeding a predetermined acceptable tracking error. This article demonstrates how this process can be adapted for use by individual investors and their advisors who want to improve an indexing strategy, but within limits. First, the investor chooses a passive, long-term benchmark portfolio. The investor then must have good cause to deviate from that benchmark, such as a tactical modification due to current economic or investment conditions or because the investor believes he or she can select superior assets or managers within an asset class. Next, the investor determines what will be the maximum acceptable tracking error--the pattern of variation from the benchmark return. Excess return opportunities are identified and a portfolio is built that deviates from the benchmark. Risk budgeting can be easily used to aid the asset allocation decision, but it is more difficult to apply to security selections at the individual investor level due to the sheer volume of calculations and lack of evidence that alphas produced by mutual fund managers are positively related to the tracking errors of their funds. Risk budgeting is not the same thing as the value-at-risk methodology commonly used by institutional investors.
ACCESSION #
19121245

 

Related Articles

  • Funds YOU Can Trust. Zweig, Jason // Money;Nov2003, Vol. 32 Issue 12, p86 

    As scandal rocks the mutual fund business, it is important to pick fund managers whose business practices are beyond reproach, and who treat their investors like partners. The first and most powerful test of whether the people who manage a fund are greedy is how much they charge to run it....

  • Right on DeMark. Patterson, James // Trader Monthly;Feb/Mar2008, Vol. 5 Issue 1, p46 

    The article focuses on the performance and market-timing techniques of Phoenix-based financial consultant Tom DeMark. It is noted that DeMark is a trusted market-timing consultant to some of the most revered money managers. He managed to bundle his arithmetically calculated entry/exit...

  • VALUE MANAGEMENT. Kavanagh, John // BRW;3/30/2006, Vol. 28 Issue 12, p28 

    The article talks about the portfolio diversification of the Australian investors into global market. The growth of the Australian stock market indicates that the country investors have concentrated on the domestic equities. Financial planners and investment strategists sought to steer the...

  • Incentive Contracts in Delegated Portfolio Management. Li, C. Wei; Tiwari, Ashish // Review of Financial Studies;Nov2009, Vol. 22 Issue 11, p4681 

    This article analyzes optimal nonlinear portfolio management contracts. We consider a setting in which the investor faces moral hazard with respect to the effort and risk choices of the portfolio manager. The employment contract promises the manager: (i) a fixed payment, (ii) a proportional...

  • Be careful what you wish for. Raubenheimer, Heidi // Finweek;3/19/2009, Special section p17 

    The article offers information on the vital role played by professional fund managers in effectively managing assets and investments in South Africa. These are the people who are both concerned with active return generation. Moreover, they also determine the fund objectives using asset/liability...

  • How can I be sure that my advisor isn't a Ponzi? Strand, Bill // Best Life;Apr2009, Vol. 6 Issue 3, p18 

    The article offers tips for ensuring that a financial adviser is not involved in fraudulent schemes. An advisor should have worked on transactions executed by well-known custodians, such as Fidelity, Schwab, or TD Ameritrade. An investor should determine who audits an investment advisor's...

  • Cut to the core. Jones, Emma // Money Marketing;2/9/2006, p60 

    The article focuses on the criteria for the identification of best fund. The author emphasized that fund analysis should result in a full understanding of what each fund manager is trying to achieve and should be prepared to achieve the degree of risk with their investors' money. Great Britain's...

  • Balanced AFI plays it safe as houses. Jackson, Will // Fund Strategy;12/4/2006, p28 

    The article reports on the performance of the British Balanced Adviser Fund Index (AFI) in 2006. The 18-strong panel has increased asset class diversification and reduced its exposure to equities in the index and indicates a cautious outlook on world markets. Fund turnover in the Balanced AFI...

  • FUND MANAGERS DIARY. Stanley, Catherine // Fund Strategy;10/10/2005, p34 

    Recounts the author's fund management experiences for a week in Great Britain. Company meetings attended; Companies looking to go public; Meeting with friends.

Share

Read the Article

Courtesy of VIRGINIA BEACH PUBLIC LIBRARY AND SYSTEM

Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics