RT Journal Article SR Electronic T1 Risk Parity Portfolio vs. Other Asset Allocation Heuristic Portfolios JF The Journal of Investing FD Institutional Investor Journals SP 108 OP 118 DO 10.3905/joi.2011.20.1.108 VO 20 IS 1 A1 Denis Chaves A1 Jason Hsu A1 Feifei Li A1 Omid Shakernia YR 2011 UL https://pm-research.com/content/20/1/108.abstract AB 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