## 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: MCARRelative, active

→ base specified, attributionMethod: MCTEAbsolute, active

→ base specified, attributionMethod: MCAR. This option is available via API only, where:Absolute Volatility

The standalone risk of the asset itselfAbsolute 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 assetRisk 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.