A Modified Risk Parity Method for Asset Allocation

16 Pages Posted: 15 Nov 2018

Date Written: October 23, 2018

Abstract

We propose a return based modification of the portfolio variance matrix for asset allocation using risk parity. The modification is based upon a single scalar parameter which can be tuned to tailor the allocation for desired expected risk and/or return. The present work contributes a new twist on risk parity. While classical risk parity methods are based exclusively on volatility, the new solution (Modified Risk Parity) considers both historical returns and their variance in the construction of an optimal, diversified investment portfolio. We present two examples for periods including the recent financial market crises. The results suggest that the modification may lead to significantly improved risk adjusted returns over those realized by the conventional risk parity method.

Keywords: Risk Parity, Asset Allocation, Minimum Variance, Optimal Portfolio

JEL Classification: G11

Suggested Citation

Maewal, Akhilesh and Bock, Joel R, A Modified Risk Parity Method for Asset Allocation (October 23, 2018). Available at SSRN: https://ssrn.com/abstract=3272080 or http://dx.doi.org/10.2139/ssrn.3272080

Akhilesh Maewal (Contact Author)

Independent ( email )

No Address Available

Joel R Bock

Trace3

San Diego, CA 92130
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
122
rank
224,982
Abstract Views
561
PlumX Metrics