Exercise

# Who did it?

In the previous video, you saw the difference between a capital allocation budget and a risk budget. In this exercise, you will construct a risk budget, and discover how large each asset's percent risk contribution is in the total portfolio volatility.

For this last exercise, you will calculate the risk contributions for a portfolio that is again invested 40% in equities, 40% in bonds, 10% in real estate, and 10% in commodities. The function StdDev() plays an important role in this exercise. The `StdDev()`

function creates a list of the assets' standard deviation (`$StdDev`

), their risk contribution (`$contribution`

), and their percent risk contribution (`$pct_contrib_StdDev`

).

You will be using three arguments in the `StdDev()`

function to do this calculation. The first is `R`

, a vector, matrix, data frame, time series, or zoo object of returns. The second is `portfolio_method`

, which you will set to `component`

, and the third is `weights`

.

The object `returns`

is loaded in your workspace.

Instructions

**100 XP**

- Create a
*vector*of the portfolio weights called`weights`

. Remember, order matters! - Calculate your volatility budget using
`StdDev()`

on the return series`returns`

. Set`portfolio_method = "component"`

and`weights`

equal to the created vector of`weights`

. Call this`vol_budget`

. - Combine the weights and the percentage risk contributions in a table called
`weights_percrisk`

using`cbind()`

. - Print the table and note how different the percentage risk contributions are compared to the portfolio weights.