By Islam BarakaDefinitions
In plain terms
For volatility, a position's contribution depends on both its weight and how it covaries with the whole portfolio.
Technical
Volatility contribution for asset i is weight i times its marginal covariance term divided by portfolio volatility; contributions sum to portfolio volatility when conditions hold.
Scope
Risk contribution can be negative and differs across variance, volatility, expected shortfall, and other risk measures.
Formula
RC_i = w_i * (Sigma*w)_i / sigma_pRC_i=w_i(\Sigma w)_i/\sigma_p| Symbol | Meaning | Unit |
|---|---|---|
w_i | weight of asset i | decimal weight |
(Sigma*w)_i | marginal covariance term | return squared |
sigma_p | portfolio volatility | return volatility |
Output unit: return volatility
Examples
- A governed methodology records risk contribution with its source, cutoff, units, parameters, and effective version.
Common misconceptions
- Risk Contribution does not have one universal implementation without the declared methodology, data basis, and constraints.
Concept relationships
Prerequisites
Related
Required by
Where this concept is used
Tutorials planned
These catalogued topics use this concept, but their complete build has not shipped yet.
- D03-F03-A05 Prerequisite
Evidence and governance
- On the Properties of Equally-Weighted Risk Contributions Portfolios The Journal of Portfolio Management · first party technical publication
Supports: preferred label, short definition, technical definition, formula
Limits: Covariance estimation, constraints, convergence, turnover, and index-provider implementation remain governed choices.
- Fintech Builder Glossary Definition Contract The Fintech Builder · internal governed contract
Supports: variant distinction
Limits: Defines governed platform behavior rather than claiming these policies are universally prescribed by external McClellan methodology.
- Reviewed by
- fintech-builder-batch-004
- Last reviewed
- 2026-07-27
- Next review
- 2027-07-27
- Record status
- published