Active risk budgeting is valuable in the construction, monitoring, and overall governance of the investment portfolio. An active risk budget identifies how much risk an investor wants to take in the portfolio and where the investor plans to allocate that risk. In this paper we provide an introduction to active risk and demonstrate how to measure and budget that risk. We also discuss the individual sources that drive active risk and why they’re important to identify. Last, we review a practical example of how active risk can inform portfolio construction and demonstrate how the Verus active management environment research can be used to inform active/passive allocations throughout the portfolio.
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