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Diversifying risk parity

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<mark>Journal publication date</mark>29/06/2014
<mark>Journal</mark>Journal of Risk
Issue number5
Volume16
Number of pages27
Pages (from-to)53-79
Publication StatusPublished
<mark>Original language</mark>English
Externally publishedYes

Abstract

Striving for maximum diversification we follow the 2009 work of Meucci in measuring and managing a multi-asset class portfolio. Under this paradigm the maximum diversification portfolio is equivalent to a risk parity strategy with respect to the uncorrelated risk sources embedded in the underlying portfolio assets. We characterize the mechanics and properties of this diversified risk parity strategy. Moreover, we explore the risk and diversification characteristics of traditional risk-based asset allocation techniques such as 1/N, minimum-variance or risk parity and show the diversified risk parity strategy to be very meaningful when benchmarked against these alternatives.