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Diversified Risk Parity Strategies for Equity Portfolio Selection

Research output: Contribution to journalJournal articlepeer-review

<mark>Journal publication date</mark>31/08/2012
<mark>Journal</mark>Journal of Investing
Issue number3
Number of pages18
Pages (from-to)111-128
Publication StatusPublished
<mark>Original language</mark>English


This article investigates a new way of equity portfolio selection that provides maximum diversification along the uncorrelated risk sources inherent in the S&P 500. This diversified risk parity strategy is distinct from prevailing risk-based portfolio construction paradigms. Especially, the strategy is characterized by a concentrated allocation that actively adjusts to changes in the underlying risk structure. In addition, x-raying the risk and diversification characteristics of traditional risk-based strategies like 1/N, minimum-variance, risk parity, or the most-diversified portfolio, the authors find the diversified risk parity strategy to be superior. Although most of these alternatives crucially pick up risk-based pricing anomalies like the low-volatility anomaly, the diversified risk parity strategy more effectively exploits systematic factor tilts.