Roncalli, Thierry (2013): Introducing Expected Returns into Risk Parity Portfolios: A New Framework for Tactical and Strategic Asset Allocation.

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Abstract
Risk parity is an allocation method used to build diversified portfolios that does not rely on any assumptions of expected returns, thus placing risk management at the heart of the strategy. This explains why risk parity became a popular investment model after the global financial crisis in 2008. However, risk parity has also been criticized because it focuses on managing risk concentration rather than portfolio performance, and is therefore seen as being closer to passive management than active management. In this article, we show how to introduce assumptions of expected returns into risk parity portfolios. To do this, we consider a generalized risk measure that takes into account both the portfolio return and volatility. However, the tradeoff between performance and volatility contributions creates some difficulty, while the risk budgeting problem must be clearly defined. After deriving the theoretical properties of such risk budgeting portfolios, we apply this new model to asset allocation. First, we consider longterm investment policy and the determination of strategic asset allocation. We then consider dynamic allocation and show how to build risk parity funds that depend on expected returns.
Item Type:  MPRA Paper 

Original Title:  Introducing Expected Returns into Risk Parity Portfolios: A New Framework for Tactical and Strategic Asset Allocation 
Language:  English 
Keywords:  risk parity, risk budgeting, expected returns, ERC portfolio, valueatrisk, expected shortfall, tactical asset allocation, strategic asset allocation 
Subjects:  G  Financial Economics > G1  General Financial Markets > G11  Portfolio Choice ; Investment Decisions 
Item ID:  49821 
Depositing User:  Thierry Roncalli 
Date Deposited:  14 Sep 2013 14:14 
Last Modified:  28 Sep 2019 22:31 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/49821 