How Risk Parity Relates to Smart Beta Strategies

# Are smart beta and risk-parity the same?


# Are smart beta and risk-parity the same?












From what I have been reading online, smart beta ETFs aim to use a different type of weighting (instead of by market cap as traditional ETFs like SPY do to track an index) to achieve positive performance.

Would risk-parity be considered a form of smart beta (basically weight investments based on volatility as opposed to market cap?).

## Answer by vonjd (score 5)

https://quant.stackexchange.com/a/25602

This is a very good question. It can be argued that risk parity is one example of a smart beta strategy.

Yet it is important to understand that both are coming from two different directions: risk parity is basically a form of risk management (in the sense of risk-adjustment) because its basic approach lies in diversification - like the alternative methods mean-variance optimization, 1/N, minimum variance and so on. Comparing it with mean-variance it is also an answer to the estimation problem because variances are more robust than covariances and you don't have to estimate means at all (which are notoriously hard to estimate).

Smart beta strategies are more coming from an income generation perspective: You try to find the factors that contribute most and overweight them. In this case one does refer to the low volatility factor (or anomaly depending on your school of thought).

So in this case both perspectives meet because you see something that results in a risk reduction also as an income generation vehicle and at the end the resulting portfolios could very well be the same, so as I said in the beginning risk parity can be seen as one example of a smart beta strategy.

## Answer by Forgottenscience (score 1)

https://quant.stackexchange.com/a/25598

They are not the same as in they are equal, but risk parity can be considered a smart beta strategy.

Smart beta is this opaque term that covers anything that can be put into a factor, regressed against returns and adjusted for, but also a host of other non-factor strategies that aim to create a mechanical, non-stock index weighting scheme that is rebalanced at some predetermined frequency - this includes risk parity.

## Answer by piRSquared (score 1)

https://quant.stackexchange.com/a/25609

Smart Beta refers a trend in making well known quantitative strategies more accessible to investors. Simple examples for equities include Value, Momentum, Quality, and Low Volatility. Fixed income might include Carry and Credit. Risk parity is a strategy that incorporates several sources of return that may include some of the smart beta strategies mentioned above. I'd consider risk parity less accessible to the broad investor in particular the retail investor.

Short answer for me is "no".

## Answer by JOHN (score 1)

https://quant.stackexchange.com/a/27866

I think this paper gives a really good overview about risk parity link. As it points out, risk parity is a alternative to traditional mean variance portfolio construction.