medium · FRM Part 2 Risk & Investment Management
A risk manager determines that the optimal portfolio is reached when the ratio (E[R_i] - r_f) / Δ VaR_i is constant across all assets.
If Asset j has a ratio higher than the constant, what action should the manager take?
- Liquidate Asset j because its marginal risk is too high.
- Increase the weight of Asset j.
- Hedge Asset j to bring its Marginal VaR down to zero.
- Decrease the weight of Asset j to harvest the alpha.
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