On portfolio risk diversification

The first portfolio risk diversification strategy was put into practice by the All Weather fund in 1996. The idea of risk diversification is related to the risk contribution of each available asset class or investment factor to the total portfolio risk. The maximum diversification or the risk parity...

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Bibliographic Details
Main Authors: Takada, Hellinton H., Stern, Julio M.
Format: Conference Proceeding
Language:English
Subjects:
Budgeting
Investment
Optimization
Parity
Portfolio diversification
Portfolio management
Risk allocation
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Summary:The first portfolio risk diversification strategy was put into practice by the All Weather fund in 1996. The idea of risk diversification is related to the risk contribution of each available asset class or investment factor to the total portfolio risk. The maximum diversification or the risk parity allocation is achieved when the set of risk contributions is given by a uniform distribution. Meucci (2009) introduced the maximization of the Rényi entropy as part of a leverage constrained optimization problem to achieve such diversified risk contributions when dealing with uncorrelated investment factors. A generalization of the risk parity is the risk budgeting when there is a prior for the distribution of the risk contributions. Our contribution is the generalization of the existent optimization frameworks to be able to solve the risk budgeting problem. In addition, our framework does not possess any leverage constraint.
ISSN:0094-243X
1551-7616
DOI:10.1063/1.4985363