Book

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

Textbook: Risk Evaluation (stochastic dominance, expected utility, VaR, CVaR, spectral measures…)

Risk and Asset Allocation, Springer 2005

We introduce the investor’s objectives. Then we tackle the problem of evaluating allocations, or more precisely the distribution of the P&L stemming from a given allocation. We introduce the concept of stochastic dominance, a criterion that allows us to evaluate the distribution of the objective as a whole Net, we take a different approach: we summarize all the properties of a distribution in a single number, namely an index of satisfaction. If the index of satisfaction is properly defined the investor can in all circumstances choose the allocation that best suits him. We analyze a set of criteria that a proper satisfaction index should or could satisfy, such as estimability, consistency with stochastic dominance, constancy, homogeneity, translation invariance, additivity, concavity, risk aversion. Then we discuss indices of satisfaction that have become popular among academics and practitioners: expected utility, or certainty equivalent, Value at Risk, Conditional Value at Risk, spectral measures of risk and satisfaction

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