Abstract

http://ssrn.com/abstract=2167058
 
 

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The Risk in Risk Parity: A Factor Based Analysis of Asset Based Risk Parity


Vineer Bhansali


Pacific Investment Management Company (PIMCO)

Josh Davis


Pacific Investment Management Company (PIMCO)

Graham Rennison


affiliation not provided to SSRN

Jason C. Hsu


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

Feifei Li


Research Affiliates, LLC

October 25, 2012

Journal of Investing, Vol. 21, No. 3, 2012

Abstract:     
The risks embedded in asset-based risk parity portfolios are explored using a simple, economically motivated factor approach. We show that such an approach can substantially demystify and make explicit the drivers of returns for asset-based risk parity portfolios. The proposed framework can be used to assess the “true” parity in the underlying risk factor exposures for a given portfolio; it also allows investors to understand the active risks that a manager might be taking against his default risk parity position. Using a number of commercial risk parity portfolio returns, we find that traditional asset-based risk strategies, which are diversified in the asset space, can often be dominated by only one or two risk factors (equity and bond factors). In addition, these risk parity portfolios often exhibit very aggressive tactical allocations to the underlying factors, suggesting that active views on asset and/or factor are being expressed in many risk parity portfolios.

Number of Pages in PDF File: 11

Keywords: risk parity, asset allocation, risk factor parity

JEL Classification: G11

Accepted Paper Series





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Date posted: October 25, 2012  

Suggested Citation

Bhansali, Vineer and Davis, Josh and Rennison, Graham and Hsu, Jason C. and Li, Feifei, The Risk in Risk Parity: A Factor Based Analysis of Asset Based Risk Parity (October 25, 2012). Journal of Investing, Vol. 21, No. 3, 2012. Available at SSRN: http://ssrn.com/abstract=2167058

Contact Information

Vineer Bhansali
Pacific Investment Management Company (PIMCO) ( email )
840 Newport Center Drive
Suite 100
Newport Beach, CA 92660
United States
949-718-2604 (Phone)
949-718-2604 (Fax)
Josh Davis
Pacific Investment Management Company (PIMCO) ( email )
United States
Graham Rennison
affiliation not provided to SSRN ( email )
Jason C. Hsu (Contact Author)
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
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