Risk Parity – Rewards Risks and Research Opportunities

Mean-Variance optimisation has come under great criticism recently, based on the poor performance experienced by asset managers during the global financial crisis.

Author(s):

Barry Schachter

Chief Risk officer, Woodbine Capital Advisors

S. Ramu Thiagarajan

Professor of Finance, Tulane University

In response, an alternative approach, called Risk Parity, which proceeds by equalising risk contributions, has garnered much interest. In this paper we summarise the work of a group of leading researchers on Risk Parity chosen for this special issue. We also survey more generally what is known about this approach. While Risk Parity has intuitive appeal and has performed well over some historical time periods, it is premature to claim the superiority of Risk Parity over other asset allocation approaches. We raise several conceptual and practical questions about Risk Parity, which we think are worthy of additional research.

Type: Working paper
Date: le 06/12/2010
Research Cluster : Finance

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