Roncalli, Thierry and Weisang, Guillaume (2012): Risk Parity Portfolios with Risk Factors.

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Abstract
Portfolio construction and risk budgeting are the focus of many studies by academics and practitioners. In particular, diversification has spawn much interest and has been defined very differently. In this paper, we analyze a method to achieve portfolio diversification based on the decomposition of the portfolio's risk into risk factor contributions. First, we expose the relationship between risk factor and asset contributions. Secondly, we formulate the diversification problem in terms of risk factors as an optimization program. Finally, we illustrate our methodology with some real life examples and backtests, which are: budgeting the risk of FamaFrench equity factors, maximizing the diversification of an hedge fund portfolio and building a strategic asset allocation based on economic factors.
Item Type:  MPRA Paper 

Original Title:  Risk Parity Portfolios with Risk Factors 
Language:  English 
Keywords:  risk parity, risk budgeting, factor model, ERC portfolio, \diversification, concentration, FamaFrench model, hedge fund allocation, strategic asset allocation 
Subjects:  G  Financial Economics > G1  General Financial Markets > G11  Portfolio Choice ; Investment Decisions C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C58  Financial Econometrics C  Mathematical and Quantitative Methods > C6  Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C60  General 
Item ID:  44017 
Depositing User:  Thierry Roncalli 
Date Deposited:  27 Jan 2013 16:02 
Last Modified:  28 Sep 2019 17:37 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/44017 