Risk Attribution

Risk attribution is a crucial step in advanced portfolio analysis. It moves beyond simply reporting the total risk of a portfolio (like its total Conditional Value at Risk) and allows managers to decompose that risk into granular, accountable components. This process identifies exactly which segments of the portfolio (e.g., asset classes, countries, sectors) are contributing the most to the overall downside risk.

The core analysis breaks down the portfolio's total risk into two distinct, yet related, measurements for each category: the Category Risk (Stand-Alone) (stand-alone risk) and the Contribution to Risk (Component Risk)(component risk). This framework is applied consistently across three key risk measures: Volatility, Value at Risk (VaR), and Conditional Value at Risk (CVaR).

The Risk Measures

The system provides attribution for three standard measures:

1. Volatility (Standard Deviation): Measures the dispersion or total uncertainty of returns around the average. It captures both upside and downside deviation.
2. Value at Risk (VaR): Estimates the maximum potential loss over a specified time horizon at a given confidence level (e.g., 95% VaR means there is a 5% chance the loss will be greater than the VaR value). It is a threshold measure.
3. Conditional Value at Risk (CVaR): Also known as Expected Shortfall (ES). It is the expected loss in the tail of the distribution, specifically, the average loss that occurs beyond the VaR threshold. CVaR is considered superior for risk budgeting because it is a coherent risk measure that satisfies the property of subadditivity, which VaR generally does not. This property is what allows its total value to be perfectly broken down into additive component parts.