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Risk capital allocation for RORAC optimization

Buch, Arne ; Dorfleitner, Gregor ; Wimmer, Maximilian
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Date of publication of this fulltext: 07 Dec 2009 12:41


Abstract

This paper considers the financial optimization problem of a firm with several sub-businesses striving for its optimal RORAC. An insightful example shows that the implementation of classical gradient capital allocation can be suboptimal if division managers are allowed to venture into all business whose marginal RORAC exceeds the firm's RORAC. The marginal RORAC requirements are refined by adding ...

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