On the Properties of Equally-Weighted Risk Contributions Portfolios

23 Pages Posted: 23 Sep 2008 Last revised: 5 Jun 2009

Sébastien Maillard

Lyxor Asset Management

Thierry Roncalli

Amundi Asset Management; University of Evry

Jerome Teiletche

Unigestion

Date Written: September 22, 2008

Abstract

Minimum variance and equally-weighted portfolios have recently prompted great interest both from academic researchers and market practitioners, as their construction does not rely on expected average returns and is therefore assumed to be robust. In this paper, we consider a related approach, where the risk contribution from each portfolio components is made equal, which maximizes diversification of risk (at least on an ex-ante basis). Roughly speaking, the resulting portfolio is similar to a minimum variance portfolio subject to a diversification constraint on the weights of its components. We derive the theoretical properties of such a portfolio and show that its volatility is located between those of minimum variance and equally-weighted portfolios. Empirical applications confirm that ranking. All in all, equally-weighted risk contributions portfolios appear to be an attractive alternative to minimum variance and equally-weighted portfolios and might be considered a good trade-off between those two approaches in terms of absolute level of risk, risk budgeting and diversification.

Keywords: Asset allocation, risk contributions, minimum-variance, portfolio construction, risk budgeting, portfolio diversification

JEL Classification: G11, C60

Suggested Citation

Maillard, Sébastien and Roncalli, Thierry and Teiletche, Jerome, On the Properties of Equally-Weighted Risk Contributions Portfolios (September 22, 2008). Available at SSRN: https://ssrn.com/abstract=1271972 or http://dx.doi.org/10.2139/ssrn.1271972

Sébastien Maillard

Lyxor Asset Management ( email )

Paris
France

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

Jerome Teiletche

Unigestion ( email )

8c, avenue de Champel CP 387
CP 387
Genève 12, CH 1211
Switzerland

Paper statistics

Downloads
6,650
Rank
647
Abstract Views
19,261