Risk Parity Fundamentals

Edward E. Qian



Discover the Benefits of Risk Parity Investing

Despite recent progress in the theoretical analysis and practical applications of risk parity, many important fundamental questions still need to be answered. Risk Parity Fundamentals uses fundamental, quantitative, and historical analysis to address these issues, such as:

• What are the macroeconomic dimensions of risk in risk parity portfolios?
• What are the appropriate risk premiums in a risk parity portfolio?
• What are market environments in which risk parity might thrive or struggle?
• What is the role of leverage in a risk parity portfolio?

An experienced researcher and portfolio manager who coined the term "risk parity," the author provides investors with a practical understanding of the risk parity investment approach. Investors will gain insight into the merit of risk parity as well as the practical and underlying aspects of risk parity investing.

Table of Contents

An Introduction to Risk Parity Principle
Risk contribution and its financial interpretation
Risk parity
Efficient portfolios through true diversification

The "Colors" of Risk Premiums
High yield as an asset class: equity in bonds’ clothing
Roll yields, prices, and commodity returns
Do currencies have risk premiums?

The "Death" of Interest Rate Risk Premium
Are bond yields too low?
Duration, yield volatility, and bond exposure
Do forward rates have anything to do with future rates?

See the Forest for the Trees
Spear and shield
See the forest for the trees
Risk-on risk-off and risk parity
The risk parity conundrum: rising rates and rising returns
No more risk parity debate?

The "Peculiarity" of Risk Parity Portfolios
Who is afraid of leverage?
Portfolio rebalancing and diversification returns of leveraged portfolios
Benchmarking risk parity
Upside participation and downside protection and risk parity portfolios

History Lessons
1994
After taper tantrum: an improved outlook for risk parity
Waiting for the other shoe to drop
Is US becoming Japan?
Risk parity and inflation

The "Wild West" of Risk Parity
Are risk parity managers risk parity?
Predicting risk parity managers’ performance
"Value" of stop-loss investment policies

Risk Parity Everywhere: Much of a Good Thing Is a Great Thing
"Go the distance:" a more granular application of risk parity
Reaching for yield: the risk parity way
Risk parity as a global macro hedge fund
Pension liabilities and risk parity