Weighted Shapley values and allocation of portfolio risk: one approach to solve the low-risk puzzle?

Abstract In this article, we extend the application of cooperative game theory to solve the so-called low-risk puzzle. Specifically, we apply concepts that consider asset weights in the allocation of portfolio risk. These weights can take into account various asset characteristics (e.g., image, popularity of an asset, corporate social responsibility, innovative strength) that have not been previously considered in portfolio risk allocation using cooperative game theory. We demonstrate the application through a simulation study. Our results show that considering assets weights could deliver added value when solving the low-risk puzzle.