Risk Parity

Mean variance optimization (MVO) is a simple, yet well-regarded asset allocation technique designed to create a portfolio that maximizes it’s expected level of return for a given level of standard deviation. Many institutions construct diversified portfolios using this simple technique, attempting to maximize their risk-adjusted returns. While popular with many practitioners, MVO does have its drawbacks during implementation. The authors of this paper explore the applicability of constructing a portfolio using a risk parity approach, analyze the historical results, and discuss the benefits and issues with following this approach. Read the full summary below.