Abstract

http://ssrn.com/abstract=2117303
 
 

Citations (3)



 


 



Efficient Algorithms for Computing Risk Parity Portfolio Weights


Denis B. Chaves


Research Affiliates, LLC

Jason C. Hsu


Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Feifei Li


Research Affiliates, LLC

Omid Shakernia


Research Affiliates, LLC

July 1, 2012

Journal of Investing, 2012, 21, no. 3 (fall): 150-163

Abstract:     
This paper presents two simple algorithms to calculate the portfolio weights for a risk parity strategy, where asset class covariance information is appropriately taken into consideration to achieve “true” equal risk contribution. Previous implementations of risk parity either (1) used a naïve 1/vol solution, which ignores asset class correlations, or (2) computed “true” risk parity weights using relatively complicated optimizations to solve a quadratic minimization program with non-linear constraints. The two iterative algorithms presented here require only simple computations and quickly converge to the optimal solution. In addition to the technical contribution, we also compute the parity in portfolio “risk allocation” using the Gini coefficient. We confirm that portfolio strategies with parity in “asset class allocation” can actually have high concentration in its “risk allocation”.

Number of Pages in PDF File: 25

Keywords: risk parity, asset allocation, portfolio management

Accepted Paper Series


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Date posted: July 26, 2012 ; Last revised: August 11, 2013

Suggested Citation

Chaves, Denis B. and Hsu, Jason C. and Li, Feifei and Shakernia, Omid, Efficient Algorithms for Computing Risk Parity Portfolio Weights (July 1, 2012). Journal of Investing, 2012, 21, no. 3 (fall): 150-163. Available at SSRN: http://ssrn.com/abstract=2117303 or http://dx.doi.org/10.2139/ssrn.2117303

Contact Information

Denis Biangolino Chaves (Contact Author)
Research Affiliates, LLC ( email )
620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States
949-325-8755 (Phone)
Jason C. Hsu
Research Affiliates, LLC ( email )
620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States
HOME PAGE: http://www.jasonhsu.org
University of California, Los Angeles - Anderson School of Business
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
Feifei Li
Research Affiliates, LLC ( email )
620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8753 (Phone)
949-325-8953 (Fax)
HOME PAGE: http://researchaffiliates.com/index.htm
Omid Shakernia
Research Affiliates, LLC ( email )
620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States
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