CHAPTER 24
Marginal Risk Contribution, Diversification, and Economic Capital Allocation
Application of portfolio theory and the use of simulation models have allowed banks to measure the aggregate risk of a portfolio that has many different sources of risk. The objective is to have a measure of risk that incorporates the risk-reduction benefits of diversification. For financial firms with multiple businesses, such as commercial banking, investment banking, and insurance (or with businesses in several countries), a new issue arises: how to measure the risk contribution of a specific business unit, that is, the marginal risk contribution. Although ...
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