Risk Budgeting Portfolios from Simulations
31 Pages Posted: 17 Mar 2022 Last revised: 8 Apr 2022
Date Written: February 18, 2022
Risk budgeting is a portfolio strategy where each asset contributes a prespecified amount to the aggregate risk of the portfolio. In this work, we propose a numerical framework that uses only simulations of returns for estimating risk budgeting portfolios. Specifically, we provide a Sample Average Approximation (SAA) algorithm with cutting planes, and a Stochastic Gradient Decent (SGD) algorithm, tailored to the risk budgeting portfolio for the Expected Shortfall. We illustrate different risk budgeting portfolios, constructed using a especially designed Julia package, on real financial data and compare it to classical portfolio strategies.
Keywords: Portfolio Allocation, Risk Parity, Expected Shortfall, Stochastic Optimisation
JEL Classification: G11, C58, C60
Suggested Citation: Suggested Citation