Book

"Risk and Asset Allocation" - Springer, by Attilio Meucci

Textbook: Estimation Risk Evaluation

Risk and Asset Allocation, Springer 2005

We realize that, since the distribution of the market is not known, an allocation cannot be a simple number. Instead, it is the outcome of a decision, contingent on the specific realization of the available information: the same allocation decision would have outputted different portfolios if the time series of market invariants had assumed different values. In order to evaluate an allocation decision it is important to track its dependence on the available information and stress test its performance in a set of different information scenarios. This is the same approach used to assess the performance of an estimator: the natural equivalent of the estimator’s loss in this context is the opportunity cost, a positive quantity that the investor should try to minimize.

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