Journal of Risk, Vol. 16, No. 5, 2014, pp. 53-79
29 Pages Posted: 19 Dec 2011 Last revised: 23 Jul 2014
Date Written: November 7, 2013
Striving for maximum diversification we follow Meucci (2009) in measuring and managing a multi-asset class portfolio. Under this paradigm the maximum diversification portfolio is equivalent to a risk parity strategy with respect to the uncorrelated risk sources embedded in the underlying portfolio assets. Our paper characterizes the mechanics and properties of this diversified risk parity strategy. Moreover, we explore the risk and diversification characteristics of traditional risk-based asset allocation techniques like 1/N, minimum-variance, or risk parity and demonstrate the diversified risk parity strategy to be quite meaningful when benchmarked against these alternatives.
Keywords: Risk-based Asset Allocation, Risk Parity, Diversification, Entropy
JEL Classification: G11, D81
Suggested Citation: Suggested Citation
Lohre, Harald and Opfer, Heiko and Orszag, Gabor, Diversifying Risk Parity (November 7, 2013). Journal of Risk, Vol. 16, No. 5, 2014, pp. 53-79. Available at SSRN: https://ssrn.com/abstract=1974446 or http://dx.doi.org/10.2139/ssrn.1974446