June 05, 2007

Moving on to a different topic, the result that the portfolios are efficient is important because if the portfolio is optimal, and the risk tolerance of the investor and the covariances of its components are known, then the risk budgeting process is straightforward. The foundation of the risk budgeting, risk control and optimization process is based on marginal risk, defined as the change in total portfolio risk per unit change in the amount allocated to the asset class.

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