Practical Applications of The Resale Value of Risk-Parity Equity Portfolios

Abstract

Pension funds should use risk parity as an alternative to actively managed cap-weighted indices, according to Eric Sorensen and Nicholas Alonso. Though the strategy is typically applied as an approach to balance risk across asset classes, the authors of this research demonstrate its flexibility and outperformance versus traditional cap-weighted indices.

Risk parity can help investors resist horizon bias, say the authors. They also note is that risk-parity portfolios suffer less in declining markets, while gaining most of the upside of rising markets, as compared with cap-weighted indices. Sorensen, who is President and CEO of PanAgora Asset Management , and co-author Alonso, who is a Portfolio Manager at the Boston-based firm, present their findings in The Resale Value of Risk Parity Portfolios , in the Winter 2015 issue of The Journal of Portfolio Management .