Risk budgeting

What it means

Allocating a portfolio’s total risk across strategies or managers, rather than allocating its capital.

The exam angle

Two managers with equal capital rarely consume equal risk. Budgeting by capital and reviewing by risk is how concentration arrives unnoticed.

Where it appears in the syllabus

• Risk & Investment ManagementFRM Part II · exam weight 15% · Factor theory, risk budgeting, attribution, hedge funds, illiquid assets.
• Asset AllocationCFA Level III · exam weight 15–20% · Capital market expectations, allocation principles, real-world constraints.
• Portfolio Management pathwayCFA Level III · exam weight 30–35% · Active equity, yield-curve and credit strategy, LDI, trade execution.

Related terms

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• Hedge fund replicationReproducing hedge fund returns using liquid instruments and factor exposures, rather than by paying for the funds…
• Liquidity-adjusted VaRVaR extended to include the cost of closing the position — the bid–ask spread and the market impact of exiting at size.
• Marginal VaRThe change in portfolio VaR from a small increase in one position — the position’s contribution to total risk at the…
• Multifactor modelA model explaining returns by exposure to several systematic factors rather than to the market alone.