Risk Budgeting Portfolios from Simulations

31 Pages Posted: 17 Mar 2022 Last revised: 8 Apr 2022

See all articles by Bernardo Freitas Paulo da Costa

Bernardo Freitas Paulo da Costa

Universidade Federal do Rio de Janeiro (UFRJ)

Silvana M. Pesenti

University of Toronto

Rodrigo Targino

Getulio Vargas Foundation (FGV) - EMAp - School of Applied Mathematics

Date Written: February 18, 2022

Abstract

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

Freitas Paulo da Costa, Bernardo and Pesenti, Silvana M. and Targino, Rodrigo, Risk Budgeting Portfolios from Simulations (February 18, 2022). Available at SSRN: https://ssrn.com/abstract=4038514 or http://dx.doi.org/10.2139/ssrn.4038514

Bernardo Freitas Paulo da Costa

Universidade Federal do Rio de Janeiro (UFRJ) ( email )

Av; Pasteur, 250
terreo - Bairro Maracana
Rio de Janeiro, Rio de Janeiro 23890000
Brazil

Silvana M. Pesenti

University of Toronto ( email )

100 St. George Street
Toronto, Ontario M5S 3G8
Canada

Rodrigo Targino (Contact Author)

Getulio Vargas Foundation (FGV) - EMAp - School of Applied Mathematics ( email )

Praia de Botafogo
Rio de Janeiro, 22250-900
Brazil

HOME PAGE: http://rtargino.netlify.app/

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