Minimum Risk vs. Capital and Risk Diversification Strategies for Portfolio Construction

24 Pages Posted: 21 Jan 2015 Last revised: 12 Feb 2015

See all articles by Francesco Cesarone

Francesco Cesarone

Rome Tre University - Department of Business Studies

Stefano Colucci

Symphonia Sgr; University of Rome III - Department of Business Studies

Date Written: January 20, 2015

Abstract

In this paper we propose an extensive empirical analysis on three different categories of portfolio selection models, each focused on different objectives: minimization of risk, maximization of capital diversification, and uniform distribution of risk allocation. This latter approach, also called Risk Parity (RP) or Equal Risk Contribution (ERC), is a recent strategy for asset allocation, where the risk measure commonly used to select RP portfolios is volatility. We propose here new developments on the ERC approach based on Conditional Value-at-Risk as risk measure.

We investigate how these classes of portfolio models (Minimum-Risk, Capital and Risk Diversification) work on seven investment universes, each with different sources of risk, which consist of equities, bonds and mixed assets. Then we highlight some strengths and weaknesses of all portfolio strategies in terms of various performance measures.

Keywords: Risk Parity, Diversification, Asset Allocation, Conditional Value-at-Risk, Portfolio Optimization, Smart Beta

JEL Classification: C06, G01

Suggested Citation

Cesarone, Francesco and Colucci, Stefano, Minimum Risk vs. Capital and Risk Diversification Strategies for Portfolio Construction (January 20, 2015). Available at SSRN: https://ssrn.com/abstract=2552455 or http://dx.doi.org/10.2139/ssrn.2552455

Francesco Cesarone (Contact Author)

Rome Tre University - Department of Business Studies ( email )

Via Silvio D'Amico 77
Via Silvio D'Amico 77
Rome, TN RM 00145
Italy

HOME PAGE: http://host.uniroma3.it/docenti/cesarone/papers.htm

Stefano Colucci

Symphonia Sgr ( email )

via Gramsci 7
Torino, Torino 10144
Italy

University of Rome III - Department of Business Studies ( email )

Via Silvio D'Amico 77
Via Silvio D'Amico 77
Rome, RM 00145
Italy

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