A Method for Risk Parity/Budgeting Portfolio Based on Gram-Schmidt Orthogonalization

Kensuke Kamauchi and Daisuke Yokouchi

Hitotsubashi Journal of commerce and management, 2021, vol. 54, issue 1, 15-27

Abstract: We introduce a risk parity/budgeting portfolio using Gram-Schmidt orthonormalization to address problems with two existing risk-based approaches, namely, the asset-based risk parity/budgeting portfolio and the risk budgeting portfolio using principal component analysis. Next, we show and compare the simulation results from the investment strategies based on the new and existing approaches. We observe that the weights of the new portfolio are more interpretable than those of existing ones and that the performance and volatility of the new portfolio are almost the same as those of existing ones, highlighting the advantages of the new approach and overcoming the difficulties of the other approaches.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitjcm:v:54:y:2021:i:1:p:15-27

DOI: 10.15057/hjcm.2020002

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