Thursday, May 24, 2012

Optimal Allocation of Diversification Benefits

Michiel J.J. Janssen
(University of Amsterdam, Netspar and Achmea)

Abstract: In the last decades measures like RAROC and RORAC have become popular for performance measurement purposes within financial institutions. These kind of measures relate the expected return of a certain product, business line or subsidiary to the amount of risk that is involved. These risk adjusted performance measures usually include some kind of correction for diversification benefits that exist between the different products, lines of business or subsidiaries within the same financial institution. The problem of the allocation of diversification benefits has been studied in various papers in the past. Different points of view have been used to do so and these often have lead to different conclusions. This papers studies the problem from a portfolio optimisation point of view. It shows which diversification allocation methodology gives the best incentives in the sense that it leads to the optimal portfolio composition of the financial institution. An example shows how the methodology can be implemented in practice.

Thursday, May 24, 2012
Time: 14h30
Room: Sala Delta, Edificio Quelhas, ISEG