RT Journal Article
SR Electronic
T1 Risk Parity and the Limits of Leverage
JF The Journal of Investing
FD Institutional Investor Journals
SP 79
OP 87
DO 10.3905/joi.2012.21.3.079
VO 21
IS 3
A1 Mike Sebastian
YR 2012
UL https://pm-research.com/content/21/3/79.abstract
AB The primary investment policy decision is the appropriate level of risk to take and how that risk should be allocated. Any investor with a mix of return-driven (equity-like) and risk-reducing (fixed income) investments will have overall asset returns highly correlated to those of the return-driven component. Equity dominates portfolio risk for a good reason—its role is to deliver returns on risk, and has done so over the long term.The ideal role of investment-grade fixed income in an institutional total fund is risk reduction; leverage distorts that property. Leveraged strategies provide limited risk and return benefits relative to traditional portfolios, except at levels of risk associated with an all-equity portfolio. Investors can navigate difficult times for equities with a market-sensitive investment strategy. Risk parity strategies are most appropriate for consideration as a component of an opportunistic or alternatives allocation, particularly at higher levels of targeted volatility. The benefits of a risk parity strategy as a total fund asset allocation approach are limited relative to the new portfolio risks introduced.TOPICS: Fixed-income portfolio management, portfolio theory, volatility measures