On the Properties of Equally-Weighted Risk Contributions Portfolios

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