RT Journal Article
SR Electronic
T1 Risk Parity and Diversification
JF The Journal of Investing
FD Institutional Investor Journals
SP 119
OP 127
DO 10.3905/joi.2011.20.1.119
VO 20
IS 1
A1 Edward Qian
YR 2011
UL https://pm-research.com/content/20/1/119.abstract
AB Traditional 60/40 asset allocation portfolios are not truly diversified because they have an unbalanced risk allocation to high-risk assets. As a result, their expected risk-adjusted returns are low. Risk parity is a new way to construct asset allocation portfolios based on the principle of risk diversification, achieving both higher risk-adjusted returns and higher total returns than traditional asset allocation approaches. The diversification benefits of risk parity portfolios also include balanced correlations to underlying asset classes and stronger downside protection against severe losses. Risk parity portfolios can also incorporate active views on risk-adjusted returns of different asset classes. All of these features make risk parity an attractive alternative to traditional asset allocation approaches.TOPICS: Portfolio management/multi-asset allocation, portfolio construction, risk management