The Properties of Alpha Risk Parity Portfolios

Gava, Jérôme and Julien Turc. 2022. “The Properties of Alpha Risk Parity Portfolios” Entropy 24, no. 11: 1631. https://www.mdpi.com/1099-4300/24/11/1631

40 Pages Posted: 28 Sep 2022 Last revised: 21 Nov 2022

See all articles by Jerome Gava

Jerome Gava

BNP Paribas; Ecole Polytechnique

Julien Turc

BNP Paribas; Ecole Polytechnique

Date Written: September 9, 2022

Abstract

Risk parity is an approach to investing that aims to balance risk evenly across assets within a given universe. The aim of this study is to unify the most commonly-used approaches to risk parity within a single framework. Links between these approaches have been identified in published literature. A key point in risk parity is being able to identify and control the contribution of each asset to the risk of the portfolio. With alpha risk-parity, risk contributions are given by a closed-form formula. There is a form of anti-symmetry - or self-duality - in alpha risk-portfolios that lie between risk budgeting and minimum-risk portfolios. Techniques from information geometry play a key role in establishing these properties.

Keywords: portfolio optimization, risk parity, risk budgeting, generalized entropy, statistical divergence, information theory, information geometry, portfolio selection, investment risk, diversification

JEL Classification: G11, C58, C60

Suggested Citation

Gava, Jerome and Turc, Julien, The Properties of Alpha Risk Parity Portfolios (September 9, 2022). Gava, Jérôme and Julien Turc. 2022. “The Properties of Alpha Risk Parity Portfolios” Entropy 24, no. 11: 1631. https://www.mdpi.com/1099-4300/24/11/1631, Available at SSRN: https://ssrn.com/abstract=4221087 or http://dx.doi.org/10.2139/ssrn.4221087

Jerome Gava

BNP Paribas ( email )

20 Boulevard des Italiens
Paris, 75009
France

Ecole Polytechnique ( email )

Route de Saclay
Palaiseau, 91128
France

HOME PAGE: http://https://portail.polytechnique.edu/economie/en

Julien Turc (Contact Author)

BNP Paribas ( email )

20 boulevard des Italiens
Paris, 75009
France

Ecole Polytechnique ( email )

Route de Saclay
Palaiseau, 91120
France

HOME PAGE: http://https://portail.polytechnique.edu/economie/en

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