Not Available for Download

Risk Parity Portfolio vs. Other Asset Allocation Heuristic Portfolios

Posted: 27 Aug 2011 Last revised: 28 Dec 2016

Denis B. Chaves

The Vanguard Group, Inc.

Jason C. Hsu

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

Feifei Li

Research Affiliates, LLC

Omid Shakernia

Research Affiliates, LLC

Date Written: December 10, 2010

Abstract

In this article, the authors conduct a horse race between representative risk parity portfolios and other asset allocation strategies, including equal weighting, minimum variance, mean–variance optimization, and the classic 60/40 equity/bond portfolio. They find that the traditional risk parity portfolio construction does not consistently outperform (in terms of risk-adjusted return) equal weighting or a model pension fund portfolio anchored to the 60/40 equity/bond portfolio structure. However, it does significantly outperform such optimized allocation strategies as minimum variance and mean–variance efficient portfolios. Over the last 30 years, the Sharpe ratios of the risk parity and the equal-weighting portfolios have been much more stable across decade-long subperiods than either the 60/40 portfolio or the optimized portfolios. Although risk parity performs on par with equal weighting, it does provide better diversification in terms of risk allocation and thus warrants further consideration as an asset allocation strategy. The authors show, however, that the performance of the risk parity strategy can be highly dependent on the investment universe. Thus, to execute risk parity successfully, the careful selection of asset classes is critical, which, for the time being, remains an art rather than a formulaic exercise based on theory.

Keywords: risk parity, heuristic

JEL Classification: G11, G10, G15

Suggested Citation

Chaves, Denis B. and Hsu, Jason C. and Li, Feifei and Shakernia, Omid, Risk Parity Portfolio vs. Other Asset Allocation Heuristic Portfolios (December 10, 2010). Journal of Investing, Vol. 20, No. 1, pp. 108-118, Spring 2011 . Available at SSRN: https://ssrn.com/abstract=1917064

Denis Biangolino Chaves

The Vanguard Group, Inc. ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

Jason C. Hsu (Contact Author)

Rayliant Global Advisors ( email )

Hong Kong

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

Paper statistics

Abstract Views
9,603