PT  - JOURNAL ARTICLE
AU  - Oleg Ruban
AU  - Dimitris Melas
TI  - Constructing Risk Parity Portfolios: <em>Rebalance, Leverage,</em>
               <br/>
               <em>or Both?</em>
AID  - 10.3905/joi.2011.20.1.099
DP  - 2011 Feb 28
TA  - The Journal of Investing
PG  - 99--107
VI  - 20
IP  - 1
4099  - https://pm-research.com/content/20/1/99.short
4100  - https://pm-research.com/content/20/1/99.full
AB  - Typical multi-asset-class portfolios can be dominated by equity risk, even when the allocation to equities is relatively modest. Achieving risk parity between equities and fixed income in an unlevered portfolio would require significant rebalancing towards fixed income. While such rebalancing can lead to a reduction in risk, portfolios with high fixed-income allocations have historically underperformed equity-dominated portfolios. However, achieving risk parity through leverage, while keeping the initial asset allocation constant, would typically require substantial levels of leverage and could lead to a significant increase in portfolio volatility. The authors combine rebalancing and leverage to construct risk parity portfolios that target the same expected return and the same portfolio risk as the initial asset allocation and examine the performance of these portfolios in different market conditions.TOPICS: Volatility measures, portfolio management/multi-asset allocation, pension funds