Risk Concentration and the Mean-Expected Shortfall Criterion

Expected Shortfall (ES, also known as CVaR) is the most important coherent risk measure in finance, insurance, risk management, and engineering. Recently, Wang and Zitikis (2021) put forward four economic axioms for portfolio risk assessment and provide the first economic axiomatic foundation for the family of ES. In particular, the axiom of no reward for concen- tration (NRC) is arguably quite strong, which imposes an additive form of the risk measure on portfolios with a certain dependence structure. We relax the axiom of NRC by introducing the notion of concentration aversion, which does not impose any specific form of the risk measure. It turns out that risk measures with concentration aversion are functions of ES and the expec- tation. Together with the other three standard axioms of monotonicity, translation invariance and lower semicontinuity, concentration aversion uniquely characterizes the family of ES. This result enhances the axiomatic theory for ES as no particular additive form needs to be assumed ex-ante. Furthermore, our results provide an axiomatic foundation for the problem of mean-ES portfolio selection and lead to new explicit formulas for convex and consistent risk measures.