City Research Online

Abstract

We provide an ample characterization for Risk Budgeting/Parity portfolios with general convex and homogeneous risk preferences for long-only portfolios, as well as for long-short portfolios. We propose a more general novel definition of Risk Budgeting/Parity portfolios that is less restrictive than the classical definition, and it guarantees their existence and uniqueness, at least for the long-only case. This case is shown to always be less risky than the Equal Weighted portfolio and a thorough mathematical characterization of Risk Budgeting/Parity portfolios is also provided. Equivalent properties are concluded for long-short risk budgeting portfolios under some additional conditions. We provide new insights about the Risk Budgeting/Parity portfolios, including that those portfolios are a rich subset of the newly coined set of Generalized Weighted Mean Constrained portfolios that, according to our knowledge, is defined for the first time in this paper. This new class of portfolios contains other portfolios with good performance, e.g., norm constrained and shortsale-constrainedportfolios. Statistical inferences for Risk Budgeting portfolios are provided for volatility and Conditional-Value-at-Risk risk preferences, and a by-product of our work is the introduction of a novel Conditional-Value-at-Risk estimator. An extensive real data analysis shows that Risk Parity portfolios have an enhanced out-of-sample performance than its benchmark portfolios by reducing the risk, but also by better balancing the trade-off between risk and return that pays off during adverse and booming market conditions.

Publication Type:	Other (Preprint)
Publisher Keywords:	Risk budgeting/parity portfolio, Portfolio theory, Risk measure
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Departments:	Bayes Business School Bayes Business School > Actuarial Science & Insurance
SWORD Depositor:	Symplectic Administrator

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