Risk parity examined
| A recent study of U.S. market data from 1970 to 2014 by 1741 Asset Management found that a simple risk-parity strategy can pay off even when the high-yield era of the 1970s is factored in. The authors examined how risk-parity and benchmark portfolios performed against changing yields over a six-month period, dividing the periods into quintiles to identify the biggest reductions/increases. The same analysis was done for the fundamental factors behind interest rate changes (inflation and GDP growth) and the authors concluded that risk parity achieves the best risk/return profile when rates rise moderately coupled with rising inflation and gradual economic growth. |
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| Conservative benchmark: 60% bonds, 30% stocks, 10% commodities; aggressive benchmark: 40% bonds, 40% stocks, 20% commodities. |
| Source: 1741 Asset Management, “Risk-parity strategies at a crossroads, or, who's afraid of rising yields?” |
| Compiled and designed by Timothy Pollard and Gregg A. Runburg |
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