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Determining and Allocating Diversification Benefits for a Portfolio of Risks

Published online by Cambridge University Press:  09 August 2013

Weihao Choo  and
Piet de Jong
Weihao Choo
Affiliation:
Department of Actuarial Studies, Macquarie UniversityNSW 2109, Australia
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Abstract

A critical problem in financial and insurance risk analysis is the calculation of risk margins. When there are a number of risks, the total risk margin is often reduced to reflect diversification. How large should the “diversification benefit” be? And how should the benefit be allocated to the individual risks? We propose a simple statistical solution. While providing a theoretical analysis, the final expressions are readily implemented in practice.

Keywords

DiversificationAllocated risk marginsStand-alone risk marginsCapital allocationEuler allocationPercentile risk aversion
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 40 , Issue 1 , May 2010 , pp. 257 - 269
Copyright
Copyright © International Actuarial Association 2010

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