T
td290
Member
Sorry, me again. Come back to have another rant about the "Incorporation of cost of return on capital calculations" chapter. Amongst the properties we are told a coherent allocation method should have is Symmetry:
The definition used by seemingly all other credible authors is far subtler an can be found in sources such as Denault, M. (2001) Coherent Allocation of Risk Capital (see http://www.risklab.ch/ftp/papers/CoherentAllocation.pdf).
This is ludicrous! If, for example, our portfolio consists of three sub-portfolios, A, B and C, all with the same stand-alone risk but with A and B perfectly correlated and C completely independent of the other two, should we really be required to allocate the same amount of capital to each sub-portfolio? Honestly, who writes this stuff?!If the risk of two sub-portfolios is the same (as measured by the risk measure), the allocation should be the same for each.
The definition used by seemingly all other credible authors is far subtler an can be found in sources such as Denault, M. (2001) Coherent Allocation of Risk Capital (see http://www.risklab.ch/ftp/papers/CoherentAllocation.pdf).