Expected Shortfall Asset Allocation: A Multi-Dimensional Risk-Budgeting Framework

Abstract

This article proposes a generalized expected shortfall risk-budgeting investing framework, which offers a simple and flexible way to deal with various risks beyond volatility—namely, valuation, asymmetry, tail, and illiquidity risks. The authors empirically illustrate the methodology by proposing a risk-based strategic allocation for a multi-asset portfolio made of traditional and alternative assets with different degrees of liquidity.

TOPICS: Risk management, performance measurement, portfolio construction, real assets/alternative investments/private equity