What concept involves allocating a predetermined amount of risk across a portfolio?

The concept that involves allocating a predetermined amount of risk across a portfolio is known as risk budgeting. This approach separates the process of risk allocation from capital allocation. With risk budgeting, investors determine how much risk they are willing to take and then distribute that risk among various assets or asset classes. This allows for a more controlled and coherent management strategy which aligns the risk taken with the expected return.

In risk budgeting, the focus is on quantifying the risk contribution of each asset, ensuring that the total risk of the portfolio does not exceed the predetermined level. This methodology helps to optimize the risk-return profile of the portfolio, as each component can be adjusted according to its risk contribution, rather than simply focusing on capital allocation alone.

Other concepts mentioned, such as asset allocation, typically focus more on the distribution of capital across asset classes rather than specifically on risk. Risk assessment involves evaluating the potential risks associated with investments but does not inherently imply a structured allocation of risk. Capital management refers to the strategies employed to manage a firm’s financial resources effectively, which can include aspects of capital structure or funding but is not directly aimed at risk allocation within a portfolio context.