Assessment of Risk Parity Asset Allocation
October 19, 2012 - Strategic Allocation
How does the risk parity asset allocation strategy (equalizing the volatility contributions of portfolio components) fare in comparison to other commonly used strategies? In their March 2012 research note entitled “The Risk Parity Approach to Asset Allocation – Climbing the Wall of Worries?”, Fabian Dori, Frank Haeusler, Manuel Krieger, Urs Schubiger and David Stefanovits contrast three popular allocation strategies: (1) traditional balanced (40% equities, 50% bonds and 10% commodities); (2) minimum variance (the mean-variance optimized portfolio with the lowest variance); and, (3) risk parity. Their asset universe includes equity index futures (FTSE 100, DAX, S&P 500, TOPIX and ASX SPI 200), 10-year government bond futures (UK, German, U.S., Japanese and Australian) and commodity index futures (GSCI agriculture, energy, industrial and precious metals and softs). For each asset allocation strategy, they model daily rebalancing of assets to specified weights. Using daily futures return data during August 1992 through June 2012, they find that: Keep Reading