IDEAS home Printed from https://ideas.repec.org/a/pal/assmgt/v18y2017i5d10.1057_s41260-016-0037-0.html
   My bibliography  Save this article

What’s the big deal about Risk Parity?

Author

Listed:
  • Anna Agapova

    (Florida Atlantic University)

  • Robert Ferguson
  • Dean Leistikow

    (Fordham University - GBA)

  • Danny Meidan

Abstract

It is often argued in defense of Risk Parity portfolios that they maximize the Sharpe ratio if their securities have identical Sharpe ratios and identical correlations. However, securities have neither identical Sharpe ratios nor this correlation structure. In realistic markets, Risk Parity portfolios do not maximize the Sharpe ratio, do not minimize variance, do not maximize the Information ratio, and do not have any other commonly sought optimal property. So, what’s the big deal about Risk Parity?

Suggested Citation

  • Anna Agapova & Robert Ferguson & Dean Leistikow & Danny Meidan, 2017. "What’s the big deal about Risk Parity?," Journal of Asset Management, Palgrave Macmillan, vol. 18(5), pages 341-346, September.
    • Handle: RePEc:pal:assmgt:v:18:y:2017:i:5:d:10.1057_s41260-016-0037-0
    DOI: 10.1057/s41260-016-0037-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41260-016-0037-0
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/s41260-016-0037-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Frazzini, Andrea & Pedersen, Lasse Heje, 2014. "Betting against beta," Journal of Financial Economics, Elsevier, vol. 111(1), pages 1-25.
    2. repec:dau:papers:123456789/4688 is not listed on IDEAS
    3. Anderson, Robert M. & Bianchi, Stephen W. & Goldberg, Lisa R., 2012. "Will My Risk Parity Strategy Outperform?," Department of Economics, Working Paper Series qt23t2s950, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tirthank Shah & Abhishek Parikh, 2019. "Does the number of holdings in a risk parity portfolio matter?," Journal of Asset Management, Palgrave Macmillan, vol. 20(2), pages 124-133, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wolfgang Bessler & Georgi Taushanov & Dominik Wolff, 2021. "Factor investing and asset allocation strategies: a comparison of factor versus sector optimization," Journal of Asset Management, Palgrave Macmillan, vol. 22(6), pages 488-506, October.
    2. Bessler, Wolfgang & Taushanov, Georgi & Wolff, Dominik, 2021. "Optimal asset allocation strategies for international equity portfolios: A comparison of country versus industry optimization," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    3. Stadtmüller, Immo & Auer, Benjamin R. & Schuhmacher, Frank, 2022. "On the benefits of active stock selection strategies for diversified investors," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 342-354.
    4. Gilles Boevi Koumou, 2020. "Diversification and portfolio theory: a review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(3), pages 267-312, September.
    5. Bessler, Wolfgang & Wolff, Dominik, 2015. "Do commodities add value in multi-asset portfolios? An out-of-sample analysis for different investment strategies," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 1-20.
    6. José Luis Miralles‐Quirós & María Mar Miralles‐Quirós & José Manuel Nogueira, 2019. "Diversification benefits of using exchange‐traded funds in compliance to the sustainable development goals," Business Strategy and the Environment, Wiley Blackwell, vol. 28(1), pages 244-255, January.
    7. Oikonomou, Ioannis & Platanakis, Emmanouil & Sutcliffe, Charles, 2018. "Socially responsible investment portfolios: Does the optimization process matter?," The British Accounting Review, Elsevier, vol. 50(4), pages 379-401.
    8. Klaus Grobys & James W. Kolari & Jere Rutanen, 2022. "Factor momentum, option-implied volatility scaling, and investor sentiment," Journal of Asset Management, Palgrave Macmillan, vol. 23(2), pages 138-155, March.
    9. Su, Yuandong & Lu, Xinjie & Zeng, Qing & Huang, Dengshi, 2022. "Good air quality and stock market returns," Research in International Business and Finance, Elsevier, vol. 62(C).
    10. Cakici, Nusret & Zaremba, Adam, 2022. "Salience theory and the cross-section of stock returns: International and further evidence," Journal of Financial Economics, Elsevier, vol. 146(2), pages 689-725.
    11. Tim Bollerslev & Sophia Zhengzi Li & Viktor Todorov, 2014. "Roughing up Beta: Continuous vs. Discontinuous Betas, and the Cross-Section of Expected Stock Returns," CREATES Research Papers 2014-48, Department of Economics and Business Economics, Aarhus University.
    12. Dimitri Vayanos & Paul Woolley, 2023. "Asset Management as Creator of Market Inefficiency," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 51(1), pages 1-11, March.
    13. Grobys, Klaus & Haga, Jesper, 2016. "Identifying portfolio-based systematic risk factors in equity markets," Finance Research Letters, Elsevier, vol. 17(C), pages 88-92.
    14. Bednarek, Ziemowit & Patel, Pratish, 2018. "Understanding the outperformance of the minimum variance portfolio," Finance Research Letters, Elsevier, vol. 24(C), pages 175-178.
    15. Ruanmin Cao & Lajos Horváth & Zhenya Liu & Yuqian Zhao, 2020. "A study of data-driven momentum and disposition effects in the Chinese stock market by functional data analysis," Review of Quantitative Finance and Accounting, Springer, vol. 54(1), pages 335-358, January.
    16. Christian Fieberg & Daniel Metko & Thorsten Poddig & Thomas Loy, 2023. "Machine learning techniques for cross-sectional equity returns’ prediction," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 45(1), pages 289-323, March.
    17. Kim, Saejoon, 2021. "Enhanced factor investing in the Korean stock market," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    18. Annaert, Jan & Mensah, Lord, 2014. "Cross-sectional predictability of stock returns, evidence from the 19th century Brussels Stock Exchange (1873–1914)," Explorations in Economic History, Elsevier, vol. 52(C), pages 22-43.
    19. Andreas Neuhierl & Michael Weber & Michael Weber, 2017. "Monetary Momentum," CESifo Working Paper Series 6648, CESifo.
    20. Andrew Y. Chen & Alejandro Lopez-Lira & Tom Zimmermann, 2022. "Does Peer-Reviewed Research Help Predict Stock Returns?," Papers 2212.10317, arXiv.org, revised Jun 2024.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:assmgt:v:18:y:2017:i:5:d:10.1057_s41260-016-0037-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.