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Will My Risk Parity Strategy Outperform?Robert M. AndersonUniversity of California, Berkeley - Department of Economics Stephen W. BianchiUniversity of California, Berkeley Lisa R. GoldbergUniversity of California at Berkeley July 6, 2012 Abstract: We gauge the return-generating potential of four investment strategies: value weighted, 60/40 fixed mix, unlevered and levered risk parity. We have three main findings. First, even over periods lasting decades, the start and end dates of a backtest can have a material effect on results; second, transaction costs can reverse ranking, especially when leverage is employed; third, a statistically significant return premium does not guarantee outperformance over reasonable investment horizons.
Number of Pages in PDF File: 30 Keywords: Risk parity, value weighting, fixed mix, leverage, turnover, trading costs, borrowing costs, market frictions, statistical significance, outperformance, Sharpe ratio JEL Classification: C10, C12, C13, C15, C22 working papers seriesDate posted: July 8, 2012 ; Last revised: August 17, 2012Suggested CitationContact Information
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