Active Risk-Based Investing

Abstract

Risk-based investment solutions are seen as incorporating no views. In this article, we propose an analytical framework that allows the introduction of explicit active views on expected asset returns in risk-based solutions. Starting from a Black-Litterman approach, we derive closed-form formulas for the weights of the active risk-based portfolio, and identify their main determinants. We discuss implementation aspects and show how our framework is related to other popular active investing methodologies. We illustrate the methodology with a multi-asset portfolio allocation problem using views based on macroeconomic regimes over the period 1974-2013.

Keywords: Risk-based investing, risk parity, Black-Litterman, risk budgeting, tactical asset allocation

JEL Classification: G11, D81, C60