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Capital weights and risk shares

A capital percentage and a volatility-contribution share can differ because covariance changes each asset’s contribution.

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Use the original model record

Asset A has 40% capital weight, standard deviation 20%, and correlation 0.3 with a 60%-weighted 10%-dispersion asset. A’s share of model volatility is approximately 60.869565%. These are two different measurements.

Inspect the covariance with the portfolio

Standalone dispersion is one input. The covariance of A with the whole portfolio also depends on the other asset and the weights. A large standalone standard deviation alone does not establish a particular risk share.

Keep signed decomposition possible

Weight questions
MeasureQuestion answered
Capital weightWhich share of the capital allocation?
Risk contributionHow much model volatility does the term contribute?
Risk shareWhat portion of the signed model decomposition?

Avoid turning a share into a recommendation

These quantities explain the entered model. They do not define an investor’s suitable risk budget, and a risk share need not behave like an ownership percentage under hedging covariance.

Further references