Decoding the quality factor - risk premia in asset allocation: risk parity

Abstract

The following paper is an additional element of the collective work “Decoding the Quality Factor”. The purpose of this additional paper is to create a "market neutral" portfolio that follows the risk parity strategy. This means an asset allocation that is based on the risk contribution of the individual assets to the total risk of the portfolio. For this purpose, we created proxies for global factor risk premia based on which we created the risk parity portfolio and a fixed weighted portfolio for comparison and additional two portfolios using factor indices to allow further comparisons. The findings from our analyses show that the use of risk parity strategy has a better risk-return profile.