Extreme events: blending PCA and ICA [7]

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Bullet points include: Clients want good performance at an acceptable level of risk, i.e. efficient use of the available risk budget: Choose the right level of risk to run (i.e. the risk budget), and Construct a portfolio (i.e. choose between assets) to deliver versus this budget. If all opportunities (and combinations) ‘equally’ (jointly) fat-tailed. Same answers as traditional mean-variance optimisation, but with risk budget adjusted accordingly. If different combinations exhibit differential fat-tailed behaviour. Portfolio construction ought in principle to change, if you can reliably estimate these differentials (and if investors don’t have quadratic utility functions)

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