FRM Part II · FRM Exam Part II · Portfolio Construction
A fund has volatility of 10% and two managers. Manager 1 has weight 50%, and its marginal contribution to risk (marginal VaR, per unit weight) is 12%. Manager 2 has weight 50% and a marginal contribution of 8%. What percentage of total portfolio risk is contributed by Manager 1?
Component risk equals weight times marginal contribution: 6% for Manager 1 and 4% for Manager 2, summing to the 10% portfolio volatility. Manager 1 therefore contributes 60% of total risk, more than its 50% capital weight, because its marginal risk is higher.
- A50%
- B60%Correct
- C40%
- D75%
Explanation
Component risk = weight × marginal contribution. Manager 1: 0.5×12 = 6; Manager 2: 0.5×8 = 4. Total = 10%, matching portfolio volatility (Euler allocation). Manager 1 share = 6/10 = 60%. Using 50% weights as risk shares is the common error.
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