Risk contribution

 

RISK CONTRIBUTION : MEASURING PORTFOLIO RISK DRIVERS


AMINDIS INSIGHTS

Estimated reading time: 2 min.

 

Risk management is essential for investors who want to understand and control portfolio volatility. The Risk Contribution methodology developed by Philippe Grégoire and Hervé Van Oppens provides a precise framework to measure how each asset class contributes to total portfolio risk and tracking error. This approach allows for an exact decomposition of risk, which is crucial for managers subject to volatility or tracking error limits.

 


KEY INSIGHTS FROM THIS ARTICLE

 

    EXACT DECOMPOSITION OF RISK

    The sum of contributions equals total portfolio volatility, providing full transparency.

    INCORPORATES ACTIVE MANAGEMENT DECISIONS

    The methodology takes into account trading that has occurred during the period.

    TRACKING ERROR CONTRIBUTION

    Measures how investment decisions affect the deviation from the benchmark.

    PRACTICAL APPLICATION

    Applicable to portfolios with frequent rebalancing, delivering relevant results even when weights vary.

 

UNDERSTANDING RISK

The risk contribution methodology allows portfolio managers to understand precisely how each investment decision drives overall risk. By isolating specific contributions, it helps identify sources of volatility and optimize risk management while respecting imposed constraints.

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COMMON QUESTIONS ABOUT THIS TOPIC


Risk contribution measures how much each segment, asset class, or position adds to the portfolio’s total risk. It links weight, volatility, and correlation to show the true drivers of portfolio risk.


It is computed by combining each component’s volatility with its correlation to the portfolio. This shows the marginal impact of a segment on overall risk, making risk decomposition transparent and traceable.


Yes. A negative contribution occurs when a segment helps reduce total portfolio risk—typically due to strong diversification or negative correlation with the rest of the portfolio.


It reveals which decisions increase or decrease risk, helps detect concentration issues, and supports more informed allocation, monitoring, and reporting.


AMINDIS computes correlation and volatility on the contribution to return, not raw returns. This isolates the true marginal impact of each segment, ensuring more intuitive, stable, and business-relevant insights.