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Article

Risk Parity: Rewards, Risks, and Research Opportunities

S. Ramu Thiagarajan and Barry Schachter
The Journal of Investing Spring 2011, 20 (1) 79-89; DOI: https://doi.org/10.3905/joi.2011.20.1.079
S. Ramu Thiagarajan
is an adjunct professor of finance at Tulane University and an investment research consultant in San Francisco, CA.
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  • For correspondence: ramuthiagarajan@yahoo.com
Barry Schachter
is the chief risk officer of Woodbine Capital Advisors, New York, NY.
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  • For correspondence: bschachter@woodbinecapital.com
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Abstract

Mean–variance optimization has recently come under great criticism based on the poor performance experienced by asset managers during the global financial crisis. In response, an alternative approach, called risk parity, which proceeds by equalizing risk contributions, has garnered much interest. The authors summarize the work of a group of leading researchers on risk parity chosen for this special issue. They survey more generally what is known about this approach. Although risk parity has intuitive appeal and has performed well over some historical time periods, it is premature to claim the superiority of risk parity over other asset allocation approaches. The authors raise several conceptual and practical questions about risk parity that they think are worthy of additional research.

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The Journal of Investing: 20 (1)
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Risk Parity: Rewards, Risks, and Research Opportunities
S. Ramu Thiagarajan, Barry Schachter
The Journal of Investing Feb 2011, 20 (1) 79-89; DOI: 10.3905/joi.2011.20.1.079

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Risk Parity: Rewards, Risks, and Research Opportunities
S. Ramu Thiagarajan, Barry Schachter
The Journal of Investing Feb 2011, 20 (1) 79-89; DOI: 10.3905/joi.2011.20.1.079
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  • Article
    • Abstract
    • RISK PARITY
    • RISK PARITY AND MODELS OF EXPECTED RETURNS
    • TWO CONCEPTS OF RISK PARITY
    • RISK PARITY/RISK PREMIA AND PORTFOLIO TIMING
    • RISK PARITY AND ESTIMATION ERROR
    • RISK PARITY PORTFOLIO CONSTRUCTION AND TRADING COSTS
    • RISK PARITY AS A POLICY PORTFOLIO
    • RP AND MV APPROACHES—THE EMPIRICAL EVIDENCE
    • RISK PARITY IN A RISK FACTOR FRAMEWORK
    • SUMMARY
    • ENDNOTES
    • REFERENCES
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