Overview

Using marginal risk analytics offers deeper insight into the impact on risk from changing a security position size to the portfolio's risk profile. This "bang-for-your-buck" metric is accompanied by the "X-Sigma-Rho" framework, which decomposes risk across intuitive risk drivers — Exposure/weighting, Risk, and Correlation — along with marginal contribution analytics.

Available as a view within Analyze.Assets, the "X-Sigma-Rho" framework calculates marginal contribution, risk & risk contribution, and correlation and is available in absolute (MCAR) and active space (MCTE) — resulting in slightly different analytic interpretations:

Absolute, non-Active

Absolute Volatility
The standalone risk of the asset itself
Absolute Correlation
The correlation of the standalone asset with the portfolio
Marginal Contribution
The expected increase in total risk given an increase in holding of the asset. Also known as Marginal Contribution to Total Risk
Risk Contribution
The contribution to total risk in terms of standard deviation

Relative, Active

Relative Volatility
The active risk of the asset itself against the index
Relative Correlation
The correlation of the asset against the index
Relative Marginal Contribution
The expected increase in active risk given an increase in the active holding of the asset. Also known as Marginal Contribution to Tracking Error
Active Risk Contribution
The contribution to active risk in terms of standard deviation.

For a detailed discussion on X-Sigma-Rho and MCAR vs. MCTE, please see the sources at the bottom of this document.

Using the X-Sigma-Rho Risk Decomposition via API

The API provides options to generate risk decomposition analytics as granular as needed using the methodology most appropriate for one’s investment process:

Absolute, non-active
→ no base, attributionMethod: MCAR
Relative, active
→ base specified, attributionMethod: MCTE
Absolute, active
→ base specified, attributionMethod: MCAR. This option is available via API only, where:
- Absolute Volatility
  The standalone risk of the asset itself
- Absolute Correlation
  The correlation of the standalone asset with the index
- Marginal Contribution
  The expected increase in active risk given an increase in holding of the asset
- Risk Contribution
  The contribution to active risk in terms of standard deviation. Also known as Marginal Contribution to Active Risk

Risk Contributors

As before, the riskContributors endpoint returns asset level risk decompositions. Historically Omega Point only provided ‘% of Risk’ / ‘% of Active Risk’ on the Total, Specific, and Factor level as a percentage of the total/active risk of the portfolio. Using the exposureRiskCorrelation endpoint, one can now get the % of Risk / % of Active Risk broken down into it’s drivers: Volatility and Correlation, as well as Marginal Contribution.

{
  model(id: "AXWW4-MH") {
    simulation(
      positionSet: {type: PORTFOLIO, id: "portfolio_2017"}
      base: {type: INDEX, id: "IDX-SPY"}
      from: "2017-06-30"
      to: "2017-06-30"
    ) {
      risk {
        date
        total
      }
      riskContributors(attributionMethod: MCTE) {
        id
        total
        exposureRiskCorrelation {
          volatility
          correlation
          marginalContribution
          riskContribution
        }
        attribution {
          summary {
            factors
            specific
          }
          exposureRiskCorrelation {
            factors {
              volatility
              correlation
              marginalContribution
              riskContribution
            }
            specific {
              volatility
              correlation
              marginalContribution
              riskContribution
            }
          }
        }
      }
    }
  }
}

Grouped Risk Contributors

groupedRiskContributors now supports Absolute and Relative methods for % of Risk and risk contribution on the group level for total, factor, and specific contributions.

{
  model(id: "AXWW4-MH") {
    simulation(
      positionSet: {type: PORTFOLIO, id: "portfolio_2017"}
      base: {type: INDEX, id: "IDX-SPY"}
      from: "2017-06-30"
      to: "2017-06-30"
    ) {
      risk {
        date
        total
      }
      groupedRiskContributors(
        groupBy: CLASSIFICATION
        classificationTier: "SECTOR"
        groupById: "GICS"
        attributionMethod: MCTE
      ) {
        id
        totalPercentEquity
        exposureRiskCorrelation {
          riskContribution
        }
        attribution {
          summary {
            factors
            specific
          }
          exposureRiskCorrelation{
            factors{
              riskContribution
            }
            specific{
              riskContribution
            }
          }
        }
      }
    }
  }
}

Sources

Jose Menchero and Ben Davis. Risk Contribution is Exposure times Volatility times Correlation: Decomposing Risk Using the X‐Sigma‐Rho Formula. The Journal of Portfolio Management, Winter 2011, pp. 97‐106.

Phil Durand, Kim Jensen, and Jose Menchero. Different Ways to Measure Marginal Contribution to Risk: Demystifying MCAR versus MCTE. MSCI Research Insight, September 2013.