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Modified Risk Parity Portfolios to Limit Concentration on Low Risk Assets in Multi-Asset Portfolios

In: AI and Analytics for Public Health

Author

Listed:
  • Fatemeh Amini

    (Iowa State University)

  • Atefeh Rajabalizadeh

    (Iowa State University)

  • Sarah M. Ryan

    (Iowa State University)

  • Farshad Niayeshpour

    (Principal Financial Group)

Abstract

In comparison with mean-variance and equally-weighted portfolios, a multi-asset risk parity portfolio can maximize the return per unit of risk by making the total risk contribution of assets equal. However, low-risk assets are weighted significantly more than others, which results in an unbalanced weight allocation. In this study, two modified versions of risk parity portfolios have been introduced to overcome the imbalance problem while focusing on maintaining a low difference of total risk contribution among assets. The performance of risk parity portfolios on Exchange Traded Fund data, as proxies for multiple asset classes, are compared with well-known benchmarks in terms of multiple performance criteria. The out-of-sample results demonstrate that a specific modified risk parity portfolio outperforms the pure risk parity portfolio and benchmarks in terms of annualized return, annualized volatility, annualized Sharpe ratio, Positive Rolling Returns, and Turnover.

Suggested Citation

  • Fatemeh Amini & Atefeh Rajabalizadeh & Sarah M. Ryan & Farshad Niayeshpour, 2022. "Modified Risk Parity Portfolios to Limit Concentration on Low Risk Assets in Multi-Asset Portfolios," Springer Proceedings in Business and Economics, in: Hui Yang & Robin Qiu & Weiwei Chen (ed.), AI and Analytics for Public Health, pages 179-189, Springer.
    • Handle: RePEc:spr:prbchp:978-3-030-75166-1_11
    DOI: 10.1007/978-3-030-75166-1_11
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