risk parity strategy
In this project, we elastrate how to build up a risk parity portfolio.
- We start with building a Naive risk parity portfolio where we assume zero-correlation among assets.
- We show that this portfolio works reasonably well for basket of assets with low correlations.
- We then show how to build a proper risk parity portfolio, accounting for correlation among assets in which we equalize risk contribution from each assets.
- show performance of each asset over time
- show their correlations and performance metrics
- show the performance of a traditional 60/40 portfolio and their risk contribution from EQ/Bond over time
In NRP, we are correlation blind (i.e., we assume 0 correlation among assets). Therefore, the risk-parity weight is dictated merely by asset volatility, and the weight for asset i is simply inverse of volatility of asset i. In this section, we show how to build Naive Risk Parity portfolios for the following cases and show the asset-wise risk contribution over time.
- two asset portfolio (EQ/Bond)
- three asset portfolio (EQ/Bond/Commodity)
- multiple asset portfolio (multiple EQ+ multiple Bond + multiple commodity)