Using risk budgeting in enterprise risk management, we would divide the profit by the VAR allowed to generate a risk-adjusted performance measure. For manager A it is 26.7% (2,000,000/7,500,000). For Manager B it is 33.3% (7,000,000/21,000,000). Thus Manager B has better risk-adjusted performance. Note that the return on capital for each manager tells a different story. For manager A it is 1.3% (2,000,000/150,000,000) and it is 1.2% (7,000,000/590,000,000) for Manager B. So although the percentage return generated is higher for Manager A, we would conclude that Manager B has better performance when risk is considered.

Using risk budgeting in enterprise risk management, a firm will allocate capital and the associated VAR to each manager depending upon managements desired exposure to each sector. An effective enterprise risk management system should monitor violations of a risk budget so that any violations are immediately reported to upper management.

A position limit places a dollar nominal cap on a given position. By placing a maximum dollar amount on each position, the firm will diversify its capital across a greater number of sectors. A liquidity limit is a position limit that is based on trading volume so that liquidity risk is minimized. A performance stopout sets a dollar limit for losses over a specified time period. Risk factor limits restrict the exposure of the portfolio to individual risk factors.