Will My Risk Parity Strategy Outperform?

30 Pages Posted: 8 Jul 2012 Last revised: 17 Aug 2012

See all articles by Robert M. Anderson

Robert M. Anderson

University of California, Berkeley - Department of Economics

Stephen Bianchi

University of California, Berkeley

Lisa R. Goldberg

University of California, Berkeley; Aperio Group

Date Written: July 6, 2012

Abstract

We gauge the return-generating potential of four investment strategies: value weighted, 60/40 fixed mix, unlevered and levered risk parity. We have three main findings. First, even over periods lasting decades, the start and end dates of a backtest can have a material effect on results; second, transaction costs can reverse ranking, especially when leverage is employed; third, a statistically significant return premium does not guarantee outperformance over reasonable investment horizons.

Keywords: Risk parity, value weighting, fixed mix, leverage, turnover, trading costs, borrowing costs, market frictions, statistical significance, outperformance, Sharpe ratio

JEL Classification: C10, C12, C13, C15, C22

Suggested Citation

Anderson, Robert M. and Bianchi, Stephen and Goldberg, Lisa R., Will My Risk Parity Strategy Outperform? (July 6, 2012). Available at SSRN: https://ssrn.com/abstract=2101898 or http://dx.doi.org/10.2139/ssrn.2101898

Robert M. Anderson

University of California, Berkeley - Department of Economics ( email )

530 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Stephen Bianchi

University of California, Berkeley ( email )

530 Evans Hall
MC #3880
Berkeley, CA 94720
United States

Lisa R. Goldberg (Contact Author)

University of California, Berkeley ( email )

Department of Statistics
367 Evans Hall
Berkeley, CA 94720-3860
United States

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

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