Journal of Investing, vol. 21, no. 3, Fall 2012, pp. 150-163.
Posted: 26 Jul 2012 Last revised: 30 Dec 2016
Date Written: July 1, 2012
This article presents two simple algorithms to calculate the portfolio weights for a risk parity strategy, where asset class covariance information is appropriately taken into consideration to achieve “true” equal risk contribution. Previous implementations of risk parity either used a naïve 1/vol solution, which ignores asset class correlations, or computed “true” risk parity weights using relatively complicated optimizations to solve a quadratic minimization program with nonlinear constraints. The two iterative algorithms presented require only simple computations and quickly converge to the optimal solution. In addition to the technical contribution, the authors compute the parity in portfolio “risk allocation” using the Gini coefficient, and confirm that portfolio strategies with parity in “asset class allocation” can actually have high concentration in its “risk allocation.”
Keywords: risk parity, asset allocation, portfolio management
Suggested Citation: Suggested Citation
Chaves, Denis B. and Hsu, Jason C. and Li, Feifei and Shakernia, Omid, Efficient Algorithms for Computing Risk Parity Portfolio Weights (July 1, 2012). Journal of Investing, vol. 21, no. 3, Fall 2012, pp. 150-163.. Available at SSRN: https://ssrn.com/abstract=2117303 or http://dx.doi.org/10.2139/ssrn.2117303