The risk parity approach to asset allocation

[摘要] ENGLISH ABSTRACT: We consider the problem of portfolio's asset allocation characterised by riskand return. Prior to the 2007-2008 financial crisis, this important problemwas tackled using mainly the Markowitz mean-variance framework. However,throughout the past decade of challenging markets, particularly for equities,this framework has exhibited multiple drawbacks.Today many investors approach this problem with a 'safety first' rule thatputs risk management at the heart of decision-making. Risk-based strategieshave gained a lot of popularity since the recent financial crisis. One of the'trendiest' of the modern risk-based strategies is the Risk Parity model, whichputs diversification in terms of risk, but not in terms of dollar values, at thecore of portfolio risk management.Inspired by the works of Maillard et al. (2010), Bruder and Roncalli (2012),and Roncalli and Weisang (2012), we examine the reliability and relationshipbetween the traditional mean-variance framework and risk parity. We emphasise,through multiple examples, the non-diversification of the traditionalmean-variance framework. The central focus of this thesis is on examining themain Risk-Parity strategies, i.e. the Inverse Volatility, Equal Risk Contributionand the Risk Budgeting strategies.Lastly, we turn our attention to the problem of maximizing the absoluteexpected value of the logarithmic portfolio wealth (sometimes called the driftterm) introduced by Oderda (2013). The drift term of the portfolio is given bythe sum of the expected price logarithmic growth rate, the expected cash flow,and half of its variance. The solution to this problem is a linear combinationof three famous risk-based strategies and the high cash flow return portfolio.

[发布机构] Stellenbosch University