As a side note, by performing portfolio optimization, a portfolio’s VaR can actually be reduced. We start by first introducing the concept of stochastic portfolio optimization through an illustrative hands-on example. Then, using this portfolio optimization technique, we apply it to four business lines or assets to compute the VaR or an unoptimized versus an optimized portfolio of assets, and see the difference in computed VaR. You will note that at the end, the optimized portfolio bears less risk and has a lower required economic capital.
