Risk parity and the efficient frontier
October 18, 2010 01:00:00 AM
Recently there has been much debate about risk parity strategies and their use of leverage. However, risk parity is really just a special case of modern portfolio theory. If we take a step back and look at the assumptions, we can better understand the case for and against risk parity and leverage. More importantly, using theory will also allow us to understand when it is appropriate to lever, and when it's time to reduce risk.