Portfolio Construction Techniques Applied to Traditional Multi Asset Portfolios

Abstract

In this paper we describe the history of different portfolio construction approaches from a simple Risk Parity approach and its extension Equal Risk Contribution over Markovitz mean-variance to conditional Value-at-Risk and others like minimum Value-at-Risk or Average Drawdown. We implement the portfolio construction methodologies in Python and estimate a set of risk and performance metrics. We apply the approaches on a traditional multi asset portfolio and empirically show that a particular approach dominates the others in most metrics.

Keywords: Equal Risk Contribution, conditional Value-at-Risk, minimum Value-at-Risk, Average Drawdown

JEL Classification: G11, G15, C14, C32