{"id":1240,"date":"2011-09-13T11:47:29","date_gmt":"2011-09-13T18:47:29","guid":{"rendered":"http:\/\/www.portfoliowizards.com\/?p=1240"},"modified":"2011-12-11T06:22:39","modified_gmt":"2011-12-11T14:22:39","slug":"risk-parity-unproven-where-is-the-list-of-proven-allocation-strategies","status":"publish","type":"post","link":"https:\/\/www.portfoliowizards.com\/risk-parity-unproven-where-is-the-list-of-proven-allocation-strategies\/","title":{"rendered":"Risk parity &#8220;unproven&#8221;? Where is the list of &#8220;proven&#8221; allocation strategies?"},"content":{"rendered":"<p>Just spotted a <a href=\"http:\/\/ai-cio.com\/Risk-parity-survey.aspx\" title=\"survey from aiCIO\">survey from aiCIO<\/a> that refers to risk parity as an &#8220;innovative but unproven&#8221; allocation strategy.<\/p>\n<p>The word &#8220;unproven&#8221; is pejorative and unduly presumptive. Proof of what? Compared to what? Has aiCIO identified examples of &#8220;proven&#8221; allocation strategies? All allocation strategies of which I&#8217;m aware involve investing in assets that entail risk of loss. Did someone &#8220;prove&#8221; some strategies when I wasn&#8217;t paying attention? Which ones? What&#8217;s the proof supposed to be? Who decides when a strategy is proven?<\/p>\n<p>Risk parity means you equal weight the portfolio contribution to risk. That&#8217;s it. That is a reasonable allocation strategy when:<\/p>\n<ul>\n<li>You&#8217;re allocating among assets that don&#8217;t have a meaningful equilibrium market cap, such as commodities<\/li>\n<li>You seek more risk than in a minimum variance portfolio but think a cap-weighted allocation is too concentrated in volatile assets<\/li>\n<li>You&#8217;re uncertain what returns to expect among the assets in your allocation, so you minimize your regret by allocating among their risk equally<\/li>\n<\/ul>\n<p>What does it mean for an allocation strategy to be &#8220;proven?&#8221; Does the Surgeon General have to issue a statement? Homeland Security? The FDA?<\/p>\n<p>Calling it &#8220;unproven&#8221; presupposes that some day the proof could come in. What is the proof? What are the criteria for a strategy to be &#8220;proven?&#8221;<\/p>\n<p>Risk parity is simply a way to allocate portfolio risk. It is an optimistic<sup>1<\/sup> skeptic&#8217;s alternative to a maximum Sharpe ratio allocation. <\/p>\n<p><sup>1<\/sup>I assume a pessimistic skeptic would stick either to cash or to minimum variance portfolios.<\/p>\n<p><g:plusone><\/g:plusone><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Just spotted a survey from aiCIO that refers to risk parity as an &#8220;innovative but unproven&#8221; allocation strategy. The word &#8220;unproven&#8221; is pejorative and unduly presumptive. Proof of what? Compared to what? Has aiCIO identified examples of &#8220;proven&#8221; allocation strategies? All allocation strategies of which I&#8217;m aware involve investing in assets that entail risk of [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[5,7,8,21],"tags":[],"class_list":["post-1240","post","type-post","status-publish","format-standard","hentry","category-portfolio-diversification","category-portfolio-risk","category-risk-parity","category-uncertainty"],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p1yD6H-k0","jetpack_sharing_enabled":true,"jetpack_likes_enabled":true,"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/www.portfoliowizards.com\/wp-json\/wp\/v2\/posts\/1240","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.portfoliowizards.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.portfoliowizards.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.portfoliowizards.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.portfoliowizards.com\/wp-json\/wp\/v2\/comments?post=1240"}],"version-history":[{"count":12,"href":"https:\/\/www.portfoliowizards.com\/wp-json\/wp\/v2\/posts\/1240\/revisions"}],"predecessor-version":[{"id":1726,"href":"https:\/\/www.portfoliowizards.com\/wp-json\/wp\/v2\/posts\/1240\/revisions\/1726"}],"wp:attachment":[{"href":"https:\/\/www.portfoliowizards.com\/wp-json\/wp\/v2\/media?parent=1240"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.portfoliowizards.com\/wp-json\/wp\/v2\/categories?post=1240"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.portfoliowizards.com\/wp-json\/wp\/v2\/tags?post=1240"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}