Investing in the Year of Corona: The Modified Risk Parity Portfolios

Abstract

Extended examples of long-term, annually rebalanced portfolio performance using the modified risk parity (MRP) approach are presented. The analysis considers three distinct diversified portfolio holdings, comprising index funds, sector funds and a blended portfolio of index and sector funds.

The analysis considers the time period 2000-mid November 2020, which includes drawdown from the March 2020 worldwide outbreak of coronavirus 2019 disease.

Comparisons of MRP return performance versus competitive portfolios of index-following or balanced funds are presented. Results indicate that for sufficiently long holding periods, substantial out-performance of MRP allocation strategies relative to passive buy-and-hold benchmarks can be realized.

Keywords: Asset Allocation, Risk Parity

JEL Classification: G11