Risky business

Published: April 2, 2012

Recent allocations to risk parity have been driven by impressive risk-adjusted long-term returns, but current interest rates might prove challenging.

Long-term results

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Between 1926 and 2010, risk-parity portfolios consisting of stocks and bonds produced Sharpe ratios 30% higher than a 60/40 mix and more than double that of a value- weighted portfolio. “Value weighted portfolio” is a market portfolio weighted by total market capitalization and rebalanced monthly to maintain value weights. “Risk parity” and “Unlevered risk parity” are portfolios that target equal risk allocation across the available instruments.
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