What's the Big Deal About Risk Parity?
Journal of Asset Management, September 2017, v(18)5, 341-346
Posted: 26 Jul 2017
Date Written: September 1, 2017
Abstract
It is often argued in defense of Risk Parity portfolios that they maximize the Sharpe ratio if their securities have identical Sharpe ratios and identical correlations. However, securities have neither identical Sharpe ratios nor this correlation structure. In realistic markets, Risk Parity portfolios do not maximize the Sharpe ratio, do not minimize variance, do not maximize the Information ratio, and do not have any other commonly sought optimal property. So, what's the big deal about Risk Parity?
Keywords: risk parity, risk, portfolio optimization, Sharpe ratio
JEL Classification: G10, G11
Suggested Citation: Suggested Citation
