The Resale Value of Risk-Parity Equity Portfolios

J. Portfolio Mgmt. 2015
  • risk parity
  • portfolio management
  • journal of portfolio management
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Published in The Journal of Portfolio Management, Winter 2015.

Executive summary

Risk parity is usually discussed in multi-asset allocation; this paper applies equal risk contribution to equity-only portfolios and judges success by compound wealth at a specified horizon, not single-period Sharpe ratios. The authors implement full equity diversification across country, sector, and size, rather than scaling individual stock betas in isolation.

Versus a rebalanced cap-weighted S&P 500, risk parity tends to dominate on resale value over medium and long horizons, especially in higher-volatility, higher-inflation, and steep yield-curve environments. The mechanism is better diversification of the equity risk premium: participation in upside with cap indices, but less destruction in volatile or falling markets. The paper also frames horizon bias as a behavioral reason investors fail to capture diversification benefits.

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