Euler’s Theorem and Application to Financial Risk Management
1. Context
In this short video from FRM Part 2, we understand the Euler’s theorem and it’s application to risk measures and their allocation to various risk factors / components / sub-portfolios. We use the theorem to define allocation of risk measures, if these risk measures satisfy the property of positive homogeneity (i.e. are homogeneous of degree 1). We had seen this application in defining Unexpected Loss Contribution (ULC) and Component VaR (CVaR). The details of the reading in which this topic appears are given below:
| Area | Investment Management and Current Readings |
| Reading | Portfolio Risk: Analytical Methods |
| Reference | Philippe Jorion, Chapter 7. Portfolio Risk: Analytical Methods In Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition, (New York: McGraw-Hill, 2007). |