An empirical study of the risk parity allocation approach using the world equity market

Abstract

The aim of this thesis is to build different Risk Parity portfolios and thereby perform an out-of-sample analysis by comparing them with other more common portfolio strategies. The reason why this portfolio allocation is investigated is because of the increasing popularity of risk based asset allocation strategies, and especially the Risk Parity approach.

For this reason the author decided to test and compare the portfolios constructed from several MSCI World country indices based on equities during the time period 1995 to 2013. And in this thesis there will be constructed Risk Parity portfolios based on different risk measurement. These two approaches are conducted because there are really no papers that investigate this.

The tests performed are based on different measurements including characteristics of return, risk, risk-adjusted performance, diversification, and investment capacity.

The results of this investigation show that the Risk Parity approach is not superior in the measurement performed in this analysis. It seems like the Risk Parity portfolios are mediocre performing when looking at risk and return characteristics. And the portfolio is somehow not always the most diversified.