"The evolution of Risk Parity: Generating performance in multi-asset portfolios through Dynamic Risk Allocation"

 

 

 

 

Although portfolio management did not change much during the 40 years after the seminal works of Markowitz and Sharpe, the development of risk budgeting techniques marked an important milestone in the deepening of the relationship between risk and asset management. Risk parity became a popular investment approach after the global financial crisis in 2008. Today institutional investors are using this approach in the development of smart beta strategies and the construction of diversified portfolios. Furthermore, the risk parity concept has continued to evolve as institutions redefine their long term investment policies.

Chapter 1: Review of the state of the art portfolio construction.

- Different tools used in portfolio optimization,

- Design of portfolio manager methods and estimation of the associated risks. 

- Difficulty in aligning robust allocation with traditional portfolio optimization theory.

Chapter 2:  Risk parity approach, extensive development of risk management practices in the last ten years. 

- Defining portfolio weights by matching risk budgets. 

- Considering other risk measures such as value-at-risk or expected shortfall.

Chapter 3:   Risk parity: An appealing framework to build Smart Beta. 

- Comparison of fundamental and risk-based indexations

- Capturing  the equity risk premium in an efficient way 

- Benefiting  from the risk diversification of ERC portfolios

Chapter 4:  Application of risk budgeting methods to the management of bond portfolios. 

- Risk Parity: A convenient model to analyze and manage the risk factors of the yield curve.  

- Credit risk management of bond portfolios.

- Risk budgeting approach is more robust than the fundamental approach to build alternative-weighted bond indexes.

Chapter 5:  How to use risk parity for alternative investments. 

- Extending risk budgeting approach by taking into account skews and kurtosis risks.  

- Describing the link between Risk Parity portfolios and the diversification return

- Managing the turn-over of portfolio rebalancing

Chapter 6:  Risk parity schemes produce more risk-balanced and risk-diversified allocation than traditional diversified funds. 

- Key development of risk budgeting techniques in defining long-term investment policy. 

- Solutions based on risk budgeting techniques for long-run allocation between asset classes, within an asset class and in line with economic risk factors.


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