Risk Parity Stability Across Estimation Windows and Rebalancing Schedules

Summary

This report evaluates risk parity, an asset allocation approach that aims to equalize the risk contributions of assets in a portfolio. It tests the approach using two historical data window designs: rolling windows and expanding recursive windows. For each design, it considers monthly, quarterly, semiannual, and annual weight adjustments. The stated goal is to assess whether risk parity’s performance stability persists across different testing choices and market periods.

The summary reports relatively stable returns, lower volatility, higher Sharpe ratios, and smaller maximum drawdowns across multiple portfolios over the stated historical intervals, including a later period in 2018. It also describes a tradeoff: the stability comes at the cost of giving up some potential for higher returns when leverage is excluded. The supplied text does not identify the assets, portfolio construction details, benchmarks, or transaction cost assumptions, so the results should be read as the report’s summarized findings rather than a complete basis for implementation.

Key ideas

• Risk parity seeks to balance each asset’s contribution to total portfolio risk.
• The report compares rolling and recursive historical data windows.
• It tests monthly, quarterly, semiannual, and annual rebalancing schedules.
• The reported portfolios show stable returns, lower volatility, stronger Sharpe ratios, and smaller drawdowns.
• The report identifies lower upside potential without leverage as a cost of the stability.

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