How Much Risk Comes From Volatility and How Much Comes from Correlation?
How much of your portfolio’s risk comes from the volatilities of the individual investments you’ve made and how much comes from the interactions those investments have with each other?
Most portfolio risk models scramble volatility and correlation together and do not allow a separation of risk into a “pure volatility” component and a “pure correlation” component, even though those two measures are key ingredients in the models.
We have devised a method of decoupling these two important components to provide an new type of risk attribution.
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