Risk Budgeting in Pension Investment

Abstract

ABSTRACTThis paper extends the concept of investment efficiency from investment management structures to include strategic asset allocation and liability related issues. The concept of risk budgeting is developed. It represents a valuable way of incorporating risk and return information to produce more efficient investment decisions. Information ratio is a key measurement in the process, and it is concluded that the risk budget should be allocated based upon the marginal contribution to it for different sources of risk. Non-financial risk is also considered in terms of both governance and risk.