Risk parity and investor portfolio choice
1University of Oulu, Oulu Business School, Department of Finance, Finance
|Online Access:||PDF Full Text (PDF, )|
|Persistent link:|| http://urn.fi/URN:NBN:fi:oulu-201606072449
|Publish Date:|| 2016-06-13
|Thesis type:||Master's thesis
In this study, we aimed to test the performance of risk parity portfolios against classically optimized Markowitz portfolios and conclude which technique leads to better performing portfolios in well developed, informationally efficient markets. We constructed 5 risk parity portfolios, the Inverse Volatility portfolio, the Maximum Diversification portfolio, the Equal Risk Contribution portfolio, the Alpha Risk Parity portfolio and the Beta Risk Parity portfolio and 2 benchmark classical portfolios, the Equally Weighted (1/N) and the Minimum Variance portfolio to measure performance against. The data used is the 50 constituting stocks of the EuroSTOXX50 index. The index itself was used as the market benchmark that was included in the analysis. The study is designed in a horse race style measuring performance using mean returns, mean excess returns, maximum drawdowns, Sharpe ratios and information ratios. Our findings indicate that a risk parity portfolio will win the horse race against a classical portfolio, however risk parity portfolios are very sensitive to the asset universe and to make the most out of these techniques, a wide asset scope, managerial skill as well as other resources are needed which might not make them easily available to the average investor.
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