TY - JOUR
T1 - Efficient Algorithms for Computing Risk<br/>Parity Portfolio Weights
JF - The Journal of Investing
SP - 150
LP - 163
DO - 10.3905/joi.2012.21.3.150
VL - 21
IS - 3
AU - Chaves, Denis
AU - Hsu, Jason
AU - Li, Feifei
AU - Shakernia, Omid
Y1 - 2012/08/31
UR - http://joi.pm-research.com/content/21/3/150.abstract
N2 - This article presents two simple algorithms to calculate the portfolio weights for a risk parity strategy, where asset class covariance information is appropriately taken into consideration to achieve “true” equal risk contribution. Previous implementations of risk parity either used a naïve 1/vol solution, which ignores asset class correlations, or computed “true” risk parity weights using relatively complicated optimizations to solve a quadratic minimization program with nonlinear constraints.The two iterative algorithms presented require only simple computations and quickly converge to the optimal solution. In addition to the technical contribution, the authors compute the parity in portfolio “risk allocation” using the Gini coefficient, and confirm that portfolio strategies with parity in “asset class allocation” can actually have high concentration in its “risk allocation.”TOPICS: Portfolio theory, statistical methods, portfolio theory
ER -