2021/06/16 by Choi, Jaehyung, Kim, Hyangju, Kim, Young Shin · 1 citation
#FOS: Economics and business #Portfolio Management (q-fin.PM)
paper · doi:10.48550/arxiv.2106.09055
We introduce diversified risk parity embedded with various reward-risk measures and more generic allocation rules for portfolio construction. We empirically test the proposed reward-risk parity strategies and compare their performance with an equally-weighted risk portfolio in various asset universes. The reward-risk parity strategies we tested exhibit consistent outperformance evidenced by higher average returns, Sharpe ratios, and Calmar ratios. The alternative allocations also reflect less downside risks in Value-at-Risk, conditional Value-at-Risk, and maximum drawdown. In addition to the enhanced performance and reward-risk profile, transaction costs can be reduced by lowering turnover rates. The diversified reward-risk parity allocations gain superior performance in the Carhart four-factor analysis.