Generalized Risk-Based Investing

43 Pages Posted: 24 Jan 2013 Last revised: 20 Apr 2013

Date Written: March 2013

Abstract

Risk-based portfolio strategies - such as Minimum Variance, Maximum Diversification, Equally-Weighted and Risk Parity, to name the most famous - have become increasingly popular in the investment industry due to their return-agnostic and risk management features. In this paper, we show that these portfolio construction methodologies are special cases of a generic function defined by two specific parameters: a regularization parameter and a risk tolerance coefficient. We investigate the theoretical properties of this class of strategies, giving expressions for optimized solutions under general and specific risk models. This allows us to discuss important distinctive features of these portfolios, such as market beta, volatility, or exposure to low-vol/low-beta factors, while not being dependent on a specific sample. We illustrate these theoretical results by an empirical investigation of a large sample of international developed market stocks over the 2002-2012 period.

Keywords: Risk-Based Investing, Minimum Variance, Risk Parity, Maximum Diversification, Equal-Weight, Low-Vol Anomaly

JEL Classification: G11, D81, C60

Suggested Citation

Jurczenko, Emmanuel and Michel, Thierry and Teiletche, Jerome, Generalized Risk-Based Investing (March 2013). Available at SSRN: https://ssrn.com/abstract=2205979 or http://dx.doi.org/10.2139/ssrn.2205979

Emmanuel Jurczenko (Contact Author)

EDHEC Business School ( email )

393 Promenades des Anglais
Nice, 06200
France
+330615174102 (Phone)

Thierry Michel

TOBAM

49-53 av. Champs Elysées
Paris, 75008
France

Jerome Teiletche

WORLD BANK ( email )

1225 Connecticut Ave NW
World Bank Treasury
Washington, DC 20433
United States
2024271937 (Phone)
20433 (Fax)

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