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Constructing Optimal Portfolios under Risk Budgeting

Asimit, V. ORCID: 0000-0002-7706-0066, Peng, L., Tunaru, R. & Zhou, F. (2023). Constructing Optimal Portfolios under Risk Budgeting. ..


A very popular investment strategy used in practice is risk parity/budgeting for which we provide a mathematical characterization where general risk preferences are considered. Statistical inferences are employed for two popular risk preferences used in practice, namely variance and Conditional Value-at-Risk. In addition, a novel Conditional Value-at-Risk estimator is proposed, which is shown to perform very well on dependent data based on simulated and real-life data, especially during periods of bull market and irrational exuberance. Our numerical results show superior performance of risk parity portfolios in terms of various measure of performance such as Sharpe ratio and diversification when comparing with other benchmark portfolios including the equally weighted portfolio. We also investigate the effect of selecting the opportunity set via Social Responsible Investment attributes over the portfolio performance, which is a topical question in the finance literature.

Publication Type: Other (Preprint)
Additional Information: Copyright the authors, 2023.
Publisher Keywords: Risk budgeting/parity; Portfolio selection; Non-parametric estimation; Social responsible investment
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HF Commerce
Departments: Bayes Business School > Actuarial Science & Insurance
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