Explanation:
The correct answer is B, EUR 22.12 million. The sum of the risk budgets allocated to the four asset classes can be calculated using the risk budget formula, which is the product of the asset class weight, the volatility of the asset class, and the VaR multiplier (2.33 for a 99% confidence level). The risk budget for each asset class is as follows:
European stocks:
Non-European stocks:
European bonds:
Non-European bonds:
Adding up the risk budgets for all asset classes gives the total sum of risk budgets: 8.62 + 3.33 + 2.96 + 7.21 = 22.12 million EUR
This sum is less than the total VaR of the fund (EUR 11.64 million) due to the diversification effect, which reduces the overall risk of the portfolio. The incorrect options A, C, and D do not accurately reflect the calculated risk budgets for the asset classes.
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In the context of portfolio management, risk budgeting is a process of allocating the total allowable risk across various asset classes to achieve the optimal balance between risk and return. Given the need to allocate risk budgets effectively, determine the total amount of risk budgets that should be assigned to the following four asset classes:
Note: Ensure the sum of the risk budgets assigned aligns with the overall risk tolerance set for the portfolio.
A
EUR11.64million
B
EUR22.12million
C
EUR38.86million
D
EUR100.0million
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