RT Journal Article
SR Electronic
T1 Constructing Risk Parity Portfolios: Rebalance, Leverage,
or Both?
JF The Journal of Investing
FD Institutional Investor Journals
SP 99
OP 107
DO 10.3905/joi.2011.20.1.099
VO 20
IS 1
A1 Oleg Ruban
A1 Dimitris Melas
YR 2011
UL https://pm-research.com/content/20/1/99.abstract
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