Diversified reward-risk parity in portfolio construction

Jaehyung Choi, Hyangju Kim and Young Shin Kim

Papers from arXiv.org

Abstract: We introduce diversified risk parity embedded with various reward-risk measures and more generic allocation rules for portfolio construction. We empirically test the proposed reward-risk parity strategies and compare their performance with an equally-weighted risk portfolio in various asset universes. The reward-risk parity strategies we tested exhibit consistent outperformance evidenced by higher average returns, Sharpe ratios, and Calmar ratios. The alternative allocations also reflect less downside risks in Value-at-Risk, conditional Value-at-Risk, and maximum drawdown. In addition to the enhanced performance and reward-risk profile, transaction costs can be reduced by lowering turnover rates. The diversified reward-risk parity allocations gain superior performance in the Carhart four-factor analysis.

Date: 2021-06, Revised 2022-09
New Economics Papers: this item is included in nep-fmk, nep-ore and nep-rmg
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