### Overview of Risk-based Investment Allocations

**February 12, 2013** - Strategic Allocation

Which risk-based asset allocation method is best? In their January 2013 preliminary paper entitled “Generalized Risk-Based Investing”, Emmanuel Jurczenko, Thierry Michel and Jerome Teletche present a general framework for risk-based asset allocation depending on two parameters: (1) level of sensitivity to asset return variance and correlation estimates; and, (2) level of tolerance for assets with high return volatilities. Popular strategies such as Minimum Variance (MV, which assumes assets have equal expected returns), Maximum Diversification (MD, which assumes assets have equal expected Sharpe ratios), Equal Weight (EW, which makes no assumptions about expected asset returns or volatilities) and Risk Parity (RP, which assumes assets have equal expected Sharpe ratios and pairwise correlations) are special cases of this general framework. They investigate the theoretical properties of this class of strategies, categorizing them by volatility, market beta, market tracking error, concentration and turnover. They illustrate theoretical conclusions with empirical findings for portfolios reformed monthly based on analysis of a two-year rolling window of individual stock returns. Using mathematical derivations and a large sample of developed market stocks (based on MSCI World composition) during January 2002 through October 2012, *they conclude that:* Keep Reading