Practical Applications of Risk Parity Optimality

Abstract

The definition of risk parity is simple: It is a popular portfolio allocation strategy that weighs assets equally according to their risk. But the reason it works is a bit of a mystery, says Philip Z. Maymin , Assistant Professor of Finance and Risk Engineering at the NYU Polytechnic School of Engineering , who will soon be joining the University of Bridgeport Trefz School of Business as an Associate Professor of Finance and Analytics. “Risk parity works. Many funds offer it and many portfolio managers are talking about it. But no one really understands why it works!”

Maymin and his co-authors ( Gregg S. Fisher , Chief Investment Officer of Gerstein Fisher , and Philip’s father Zakhar G. Maymin, formerly head of research at Gerstein Fisher’s research center) present their theoretical framework, explain their reasoning and provide empirical support using the returns of stocks and bonds.