| Abstract: | Capital allocation techniques are of central importance in portfolio management and risk-based performance measurement. In this paper we propose an axiom system for capital allocation and analyze its satisfiability and completeness: it is shown that for a given risk measure ρ there exists a capital allocation Λρ that satisfies the main axioms if and only if ρ is subadditive and positively homogeneous. Furthermore, it is proved that the axiom system uniquely specifies Λρ . We apply the axiomatization to the most popular risk measures in the finance industry in order to derive explicit capital allocation formulae for these measures. |
