Risk Parity and Black-Litterman for Multi-Asset Portfolios
Summary
The report combines risk parity with the Black-Litterman framework to build stock-and-bond and broader multi-asset portfolios. It uses risk-parity weights as the prior allocation, short-term momentum as an investment view, and Black-Litterman to estimate posterior expected returns. Those estimates feed a mean-variance optimization, with a tracking-error constraint used to manage portfolio volatility. The approach aims to retain risk parity’s volatility control while adding return information that risk-parity allocations alone do not use.
Historical results are reported for lower- and higher-volatility versions of the stock-and-bond and four-asset strategies. The lower-volatility versions are said to improve on their risk-parity benchmarks, with the four-asset version showing a larger improvement. The report also gives annualized return, volatility, risk-adjusted return, and maximum drawdown figures for selected variants. These are historical results, not evidence of future performance; the authors flag model misspecification and failure, as well as losses during liquidity stress or overseas market shocks.
Key ideas
- Risk parity weights are used as prior allocations in a Black-Litterman model.
- Short-term momentum supplies investment views that update expected returns.
- Posterior return estimates are optimized with a mean-variance portfolio model.
- A tracking-error constraint is used to limit portfolio volatility.
- Reported performance is historical and may not persist, especially during market stress.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.