Risk parity portfolios with risk factors

Thierry Roncalli and G. Weisang

Quantitative Finance, 2016, vol. 16, issue 3, 377-388

Abstract: Portfolio construction and risk budgeting are the focus of many studies by academics and practitioners. In particular, diversification has spawned much interest and has been defined very differently. In this paper, we analyse a method to achieve portfolio diversification based on the decomposition of the portfolio’s risk into risk factor contributions. First, we expose the relationship between risk factor and asset contributions. Secondly, we formulate the diversification problem in terms of risk factors as an optimization program. Finally, we illustrate our methodology with a real example of building a strategic asset allocation based on economic factors for a pension fund facing liability constraints.

Date: 2016
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Citations: View citations in EconPapers (27)

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Working Paper: Risk Parity Portfolios with Risk Factors (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:16:y:2016:i:3:p:377-388

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DOI: 10.1080/14697688.2015.1046907

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