A Set of New Methods and Tools for Enterprise Risk Capital Management and Portfolio Optimization

The focus of this paper is on some new developments in the methodologies for enterprise risk management (ERM). The paper presents a set of new methods and tools, including (i) a universal risk measure tbr both assets and liabilities, (ii) a coherent method of determining the aggregate capital requirement for a firm, and (iii) a coherent method of allocating the cost of capital to individual business units. The discussed methods can be used for asset/loss portfolio optimization, and for quantifying the "'value creation" of ERM. The paper also discusses some correlation models and methods for risk aggregation.