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Risk Parity and Beyond—From Asset Allocation to Risk Allocation Decisions

Author

Listed:
  • Romain Deguest

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

  • Lionel Martellini

    (EDHEC - EDHEC Business School - UCL - Université catholique de Lille)

  • Attilio Meucci

    (Advanced Risk and Portfolio Management (ARPM))

Abstract

In this article, the authors define the number of uncorrelated bets embedded within a given portfolio of N assets as the exponential of the entropy of the portfolio exposure to N uncorrelated factors. They present a set of formal results regarding the existence and uniqueness of portfolios designed to achieve the maximum effective number of bets. They also provide empirical evidence that incorporating constraints or target levels in a portfolio's effective number of bets generates an improvement in out-of-sample risk-adjusted performance with respect to standard mean–variance analysis.

Suggested Citation

  • Romain Deguest & Lionel Martellini & Attilio Meucci, 2022. "Risk Parity and Beyond—From Asset Allocation to Risk Allocation Decisions," Post-Print hal-03700866, HAL.
    • Handle: RePEc:hal:journl:hal-03700866
    DOI: 10.3905/jpm.2022.1.340
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    Cited by:

    1. Gilles Boevi Koumou, 2023. "Risk budgeting using a generalized diversity index," Journal of Asset Management, Palgrave Macmillan, vol. 24(6), pages 443-458, October.

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