Risk-Parity Allocation Across Asset Classes and Style Premia

Summary

This report proposes diversifying portfolios across market, style, and strategy risk premia rather than allocating only among broad asset classes. It uses representative global equity, bond, and commodity indices to construct long-only strategies reflecting short-term low volatility, medium-term momentum, and longer-term cycles. A risk-parity model then allocates across these strategies. The authors describe low correlations among different premia as a source of diversification and compare the resulting portfolio with a baseline focused on asset allocation.

The reported backtest says the diversified approach reduced maximum drawdown and raised the Sharpe ratio by 0.5 versus the baseline. Adding volatility targets of 10% or 4.5% is reported to stabilize portfolio volatility; without transaction costs, the controlled strategy’s Sharpe ratio exceeded 1.7. These are historical model results, not live performance. The report also acknowledges that long-only broad-asset strategies cannot cleanly isolate style premia from market premia, and that historical relationships may fail. The supplied text summarizes the findings but does not include the full report’s methodology or underlying data.

Key ideas

• The report distinguishes market, style, and strategy risk premia as potential sources of portfolio returns.
• It constructs low-volatility, momentum, and cyclical strategies across global equity, bond, and commodity indices.
• Risk parity is used to allocate across the strategies and diversify exposures.
• The report states that volatility targeting improved historical backtest results, excluding transaction costs.
• Its long-only asset approach cannot fully separate style returns from broad market exposure, and historical results may not persist.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.