The Designment Of Risk Allocation Strategy Of FOF

Markowitz mean-variance model only considers the overall risk but ignores the structure of the risk of investment portfolio.Therefore,the risk of the portfolio is often controlled by someone asset which is contrary to the diversified investment.One of the core purpose of FOF is flexibly allocating the low correlation's Categories of Assets so as to diversifying the investing risk.For our country's FOF is in the infancy,the research of FOF' Risk allocation Strategy will have theoretical and realistic significance.Risk Allocation Strategy allocates the assets according to the risk.Instead of chasing the excess return,it acquires the reasonable return in term of stable performance and targets the market risk premium in most situations.The relative methods of risk allocation such as Equal weights,Minimizing the Variance,Most Diversification,Inverse Volatility etc.do not satisfy the Portfolio Manager's demands in the aspect of risk allocation.Risk Parity and Risk Budgeting which are established on the deepen understanding of the risk structure acquire the comprehensive attention once appearing because of its superior performance.So they also become the revolutionary technological breakthrough on Portfolio Optimization Theory since Markowitz.But Chinese practitioners' cognition about the methods is still in the bud.The authentic application of practice is also very less.So this paper try to give an in-depth research on the risk allocation strategy of FOF which is based on Risk Parity and Risk Budgeting.Here is the arrangement of this article structure.Chapt 1 introduces the background and motivation of the research,inculding the idea,frameworks and main contributors of this research.Chapt 2 combines the relative references from Modern Portfolio to Risk Allocation and introduces the relative allocation methods including Equal weights,Minimizing the Variance,Most Diversification,Inverse volatility and analyzes the limitations of these methods.Chapt 3 introduces the methods of risk decomposition,Risk Parity and Risk Budgeting and the risk allocation methods which is based on risk factors.Last,the report gives an analysis on the applicable scenario of relative risk allocation methods.Chapt 4 designs risk allocation strategy based on Risk Parity.Firstly we compare Risk parity and traditional diversification style funds and other relative risk allocation methods;on the basis of analyzing its advantages and disadvantages,we put forward some improved strategies including Risk Parity using other risk measures,Leveraged Risk Parity,Active Risk Parity fusions of B-L model et..Then we designs Risk Factor Parity Strategy by putting risk factor as the object of risk allocation.Chapt 5 designs risk allocation strategy based on Risk Budgetting.Firstly we design the unconstrained dynamic risk budgeting by expected return weighted.Then we design the benchmark-constrained Dynamic Risk Budgeting by expected Sharp Ratio weighted based on Risk Parity.Chapt 6 concludes this paper and indicates the weakness and future research directions.The paper's conclusion is as follows.Risk Parity acquires better risk control in comparison with traditional diversification style funds and better risk diversification in comparision to relative risk allocation methods such as Equal weights,Minimizing the Variance,Most Diversification,Inverse volatility.We can also acquire better risk/return profile by improving the Risk Parity,including using other risk measures and lever,fusing B-L model et.,especially Active Risk Parity.When the correlation of assets is high,Risk Parity also can't spread risk,but Risk Factor Parity can acquire more independent risk factors.The introduction of risk anticipation allows the design of a Dynamic Risk Budgeting.The unconstrained Dynamic Risk Budgeting can increase the greater return,but the risk increases more.The better risk return profile can be achieved by constraining the risk budget.