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Risk Parity Portfolio vs. Other Asset Allocation Heuristic Portfolios

Denis Chaves, Jason Hsu, Feifei Li and Omid Shakernia
The Journal of Investing Spring 2011, 20 (1) 108-118; DOI: https://doi.org/10.3905/joi.2011.20.1.108
Denis Chaves
is a senior researcher at Research Affiliates, LLC, in Newport Beach, CA.
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  • For correspondence: chaves@rallc.com
Jason Hsu
is CIO at Research Affiliates, LLC, in Newport Beach, CA, and professor of finance at UCLA Anderson Business School in Los Angeles, CA.
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  • For correspondence: hsu@rallc.com
Feifei Li
is a director of research at Research Affiliates, LLC, in Newport Beach, CA.
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  • For correspondence: li@rallc.com
Omid Shakernia
is a senior researcher at Research Affiliates, LLC, in Newport Beach, CA.
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  • For correspondence: shakernia@rallc.com
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Abstract

In this article, the authors conduct a horse race between representative risk parity portfolios and other asset allocation strategies, including equal weighting, minimum variance, mean–variance optimization, and the classic 60/40 equity/ bond portfolio. They find that the traditional risk parity portfolio construction does not consistently outperform (in terms of risk-adjusted return) equal weighting or a model pension fund portfolio anchored to the 60/40 equity/bond portfolio structure. However, it does significantly outperform such optimized allocation strategies as minimum variance and mean–variance efficient portfolios. Over the last 30 years, the Sharpe ratios of the risk parity and the equal-weighting portfolios have been much more stable across decade-long subperiods than either the 60/40 portfolio or the optimized portfolios. Although risk parity performs on par with equal weighting, it does provide better diversification in terms of risk allocation and thus warrants further consideration as an asset allocation strategy. The authors show, however, that the performance of the risk parity strategy can be highly dependent on the investment universe. Thus, to execute risk parity successfully, the careful selection of asset classes is critical, which, for the time being, remains an art rather than a formulaic exercise based on theory.

TOPICS: Portfolio management/multi-asset allocation, quantitative methods, volatility measures

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Risk Parity Portfolio vs. Other Asset Allocation Heuristic Portfolios
Denis Chaves, Jason Hsu, Feifei Li, Omid Shakernia
The Journal of Investing Feb 2011, 20 (1) 108-118; DOI: 10.3905/joi.2011.20.1.108

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Risk Parity Portfolio vs. Other Asset Allocation Heuristic Portfolios
Denis Chaves, Jason Hsu, Feifei Li, Omid Shakernia
The Journal of Investing Feb 2011, 20 (1) 108-118; DOI: 10.3905/joi.2011.20.1.108
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  • Article
    • Abstract
    • RISK PARITY ARGUMENT
    • OTHER COMPELLING PORTFOLIO HEURISTICS
    • A HORSE RACE BETWEEN RISK PARITY AND OTHER ASSET ALLOCATION STRATEGIES
    • DISCUSSION
    • SENSITIVITY TO ASSET CLASS UNIVERSE
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF

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