Diversified Risk Parity Strategies for Equity Portfolio Selection

Posted: 1 May 2012 Last revised: 17 Sep 2012

See all articles by Harald Lohre

Harald Lohre

Invesco; Centre for Endowment Asset Management, Cambridge Judge Business School, University of Cambridge; Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy, Lancaster University Management School

Dr. Ulrich Neugebauer

Deka Investment GmbH

Carsten Zimmer

Deka Investment GmbH

Date Written: May 9, 2012

Abstract

We investigate a new way of equity portfolio selection that provides maximum diversification along the uncorrelated risk sources inherent in the S&P 500 constituents. This diversified risk parity strategy is distinct from prevailing risk-based portfolio construction paradigms. Especially, the strategy is characterized by a concentrated allocation that actively adjusts to changes in the underlying risk structure. In addition, x-raying the risk and diversification characteristics of traditional risk-based strategies like 1/N, minimum-variance, risk parity, or the most-diversified portfolio we find the diversified risk parity strategy to be superior. While most of these alternatives crucially pick up risk-based pricing anomalies like the low-volatility anomaly we observe the diversified risk parity strategy to more effectively exploit systematic factor tilts.

Keywords: risk-based portfolio construction, risk parity, diversification, entropy

JEL Classification: G11, D81

Suggested Citation

Lohre, Harald and Neugebauer, Ulrich and Zimmer, Carsten, Diversified Risk Parity Strategies for Equity Portfolio Selection (May 9, 2012). Journal of Investing, Vol. 21, No. 3, 2012, Available at SSRN: https://ssrn.com/abstract=2049280 or http://dx.doi.org/10.2139/ssrn.2049280

Centre for Endowment Asset Management, Cambridge Judge Business School, University of Cambridge

Cambridge
United Kingdom

HOME PAGE: http://https://www.jbs.cam.ac.uk/faculty-research/centres/ceam/

Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy, Lancaster University Management School

Bailrigg
Lancaster LA1 4YX
United Kingdom

HOME PAGE: http://www.lancaster.ac.uk/lums/research/research-centres/financial-econometrics/

Ulrich Neugebauer

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

Carsten Zimmer

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

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