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