What is the primary objective of risk budgeting in portfolio management?

The primary objective of risk budgeting in portfolio management is to allocate risk across investments strategically. This approach involves identifying, measuring, and managing the different types of risks associated with various investments within a portfolio. By using risk budgeting, portfolio managers aim to optimize the risk-return profile of the portfolio rather than simply avoiding risk or chasing high returns.

Through careful allocation, managers can ensure that each investment contributes appropriately to the overall risk and potential return of the portfolio. This allows for a more balanced exposure to risk, helping to achieve long-term investment goals while acknowledging that some level of risk is necessary to generate returns. Effective risk budgeting recognizes that different assets have varying risk characteristics and strives to align these with the investor's objectives and risk tolerance.