The Properties of Equally Weighted Risk Contribution Portfolios
Top Cited Papers
- 31 July 2010
- journal article
- Published by With Intelligence LLC in The Journal of Portfolio Management
- Vol. 36 (4), 60-70
- https://doi.org/10.3905/jpm.2010.36.4.060
Abstract
Minimum-variance portfolios and equally weighted portfolios have recently prompted great interest from both academic researchers and market practitioners because their construction does not rely on expected average returns and, therefore, is assumed to be robust. In this article, the authors consider a related approach in which the risk contribution from each portfolio component is made equal, maximizing the diversification of risk, at least, on an ex ante basis. Roughly speaking, the resulting portfolio is similar to a minimum-variance portfolio subject to a diversification constraint on the weights of its components. The authors derive the theoretical properties of such a portfolio and show that its volatility is located between those of minimum-variance and equally weighted portfolios. Empirical applications confirm that ranking. Equally weighted risk contribution portfolios appear to be an attractive alternative to minimum-variance and equally weighted portfolios and, therefore, could be considered a ...Keywords
This publication has 22 references indexed in Scilit:
- Toward Maximum DiversificationThe Journal of Portfolio Management, 2008
- Optimal Portfolio Diversification Using the Maximum Entropy PrincipleEconometric Reviews, 2008
- Fundamental Indexation and International DiversificationThe Journal of Portfolio Management, 2008
- Optimal Versus Naive Diversification: How Inefficient is the 1/NPortfolio Strategy?The Review of Financial Studies, 2007
- Minimum-Variance Portfolios in the U.S. Equity MarketThe Journal of Portfolio Management, 2006
- Fundamental IndexationCFA Magazine, 2005
- Portfolio Constraints and the Fundamental Law of Active ManagementCFA Magazine, 2002
- Naive Diversification Strategies in Defined Contribution Saving PlansAmerican Economic Review, 2001
- Diversity-Weighted IndexingThe Journal of Portfolio Management, 1998
- Diversification Returns and Asset ContributionsCFA Magazine, 1992