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 Chaves, Denis
A1 Hsu, Jason
A1 Li, Feifei
A1 Shakernia, Omid
YR 2011
UL http://joi.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.