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Diversified reward-risk parity in portfolio construction

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  • Jaehyung Choi
  • Hyangju Kim
  • Young Shin Kim

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.

Suggested Citation

  • Jaehyung Choi & Hyangju Kim & Young Shin Kim, 2021. "Diversified reward-risk parity in portfolio construction," Papers 2106.09055, arXiv.org, revised Sep 2022.
    • Handle: RePEc:arx:papers:2106.09055
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    References listed on IDEAS

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    Cited by:

    1. Jaehyung Choi, 2021. "Maximum Drawdown, Recovery, and Momentum," JRFM, MDPI, vol. 14(11), pages 1-25, November.

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