Diversifying Risk Parity

Abstract:     
Striving for maximum diversification we follow Meucci (2009) in measuring and managing a multi-asset class portfolio. Under this paradigm the maximum diversification portfolio is equivalent to a risk parity strategy with respect to the uncorrelated risk sources embedded in the underlying portfolio assets. Our paper characterizes the mechanics and properties of this diversified risk parity strategy. Moreover, we explore the risk and diversification characteristics of traditional risk-based asset allocation techniques like 1/N, minimum-variance, risk parity, or the most-diversified portfolio and demonstrate the diversified risk parity strategy to be quite meaningful when benchmarked against these alternatives.

Number of Pages in PDF File: 23

Keywords: Risk-based Asset Allocation, Risk Parity, Diversification, Entropy

JEL Classification: G11, D81

working papers series