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What’s the big deal about Risk Parity?

Author

Listed:
  • Anna Agapova

    (Florida Atlantic University)

  • Robert Ferguson

  • Dean Leistikow

    (Fordham University - GBA)

  • Danny Meidan

Abstract

It is often argued in defense of Risk Parity portfolios that they maximize the Sharpe ratio if their securities have identical Sharpe ratios and identical correlations. However, securities have neither identical Sharpe ratios nor this correlation structure. In realistic markets, Risk Parity portfolios do not maximize the Sharpe ratio, do not minimize variance, do not maximize the Information ratio, and do not have any other commonly sought optimal property. So, what’s the big deal about Risk Parity?

Suggested Citation

  • Anna Agapova & Robert Ferguson & Dean Leistikow & Danny Meidan, 2017. "What’s the big deal about Risk Parity?," Journal of Asset Management, Palgrave Macmillan, vol. 18(5), pages 341-346, September.
    • Handle: RePEc:pal:assmgt:v:18:y:2017:i:5:d:10.1057_s41260-016-0037-0
    DOI: 10.1057/s41260-016-0037-0
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    References listed on IDEAS

    as
    1. Frazzini, Andrea & Pedersen, Lasse Heje, 2014. "Betting against beta," Journal of Financial Economics, Elsevier, vol. 111(1), pages 1-25.
    2. repec:dau:papers:123456789/4688 is not listed on IDEAS
    3. repec:cdl:econwp:qt23t2s950 is not listed on IDEAS
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    Cited by:

    1. Tirthank Shah & Abhishek Parikh, 2019. "Does the number of holdings in a risk parity portfolio matter?," Journal of Asset Management, Palgrave Macmillan, vol. 20(2), pages 124-133, March.

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