Asset Allocation Method Risk Parity And Its Application

With the increasing income of residents and the increasing financial management concept,the demand for asset allocation is constantly increasing,and the wealth of financial instruments in the market has provided the necessary conditions for asset allocation.Assert allocation is a concerned topic in the industry of finance.Macro economic cycle will affect the rate of return on assets such as stocks,bonds,commodities.So how to grasp the changes of the categories of asset returns and adjust asset weight dynamically to get excess profits is an important question that the investors concerned.In this paper,we introduced equivalence weight model,Markowitz model,B-L model,target risk model and risk parity model and compared the difference between them.Risk parity just depends on risk dimensions.Under certain conditions,the result of risk parity and other models will be the same:When volatility and correlation of all asserts are the same,risk parity model is equivalent to equivalence weight model;When Sharpe ratio and correlation of all asserts is the same,risk parity model is equivalent to Markowitz model.This paper mainly introduced the parity risk model and its improved model,its core idea is to ensure that risk contribution of each asset in the portfolio is the same.When using maximum drawdown define risk,we constructed the maximum drawdown risk parity model.By introducing the momentum factor to risk parity model,we effectively thickening the return of model.When highly correlated between assets,the result of risk parity may be not good,we find the risk parity model based on the risk factors.In order to more fully understand the risk parity model,based on the CSI 300,CSI 500,HSI and NASADAQ 100,DAX,five-year bond index and gold index,we build a portfolio and find that the net worth of risk parity is smooth.Due to the large bond weighted,the annual yield of portfolio is only 4.1%,it is difficult to meet the needs of investors.In order to improve the excess-return of the portfolio,we introduce the momentum factor,and we find that annualized yield increased to 8.6%and Sharpe ratio is greater than 1.Comparison of results before and after improvement,The weight of bond assets fell sharply,the assets profit contribution changes averagely.Compared to risk parity model,equivalence weight model and Markowitz model,we find that risk parity can achieve the best risk return ratio.To sum up,the risk parity model,as a kind of emerging asset allocation method based on the risk,compared with the traditional method,can achieve good results.