Portfolio Construction and Management
First published:
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Optimisation of trading portfolios under regulatory capital constraints
Brice Benaben and Andrew Green
Foreword: Preparing for change: Notes from an asset management leader
Preface
Introduction
The evolution of portfolio theory
Factor investing for practitioners
Introduction to alternative risk premium investing
Systematic credit investing
Enhanced risk parity and factor investing: ATP’s surplus investment strategy based on risk allocation to investment factors
Integrating climate risk considerations within portfolios: An investor’s viewpoint
Bridging theory and practice: Setting investment objectives
Bridging theory and practice: Developing an investment strategy and implementing a solution
Optimisation of trading portfolios under regulatory capital constraints
The wealth management perspective
The asset management challenge
Ignorance is bliss: Applying risk management techniques from alternatives to long only investing
The digitalisation of portfolio construction – Part 1
The digitalisation of portfolio construction – Part 2
Like a rational economic agent, investment banks aim to maximise their expected profits. Their profits are derived from providing financial services and products to corporate and institutional clients. This is the main source of risk rather than taking market views as the Volcker Rule prohibits banks from proprietary trading. The important feature in the trading portfolios construction is the risk allocation, which is the topic of this chapter.
However, investment banks‘ risk frameworks have a regulatory dimension. While servicing their clients, banks take market risks, which are managed within their trading portfolios. Due to the important role of banks within the financial system, banks are regulated, and regulatory rules ensure that they have enough capital to cover these market risks.
We will review the regulatory rules, and focus first on the methodology to compute the market risk capital for the trading books. The new regulatory rules (Fundamental Review of the Trading Book, FRTB) encourage banks to cover a wide spectrum of market risks using modern risk management concepts.
Our second focus is on capital value adjustment (KVA). Investment banks have large positions in
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