Theoretical And Empirical Study Of Risk Parity Model Based Risk Factors

Asset allocation is the focus of many studies and practitioners,Markowitz established the Modern Portfolio Theory,defined the return and risk of portfolio,and introduced quantitative analysis into portfolio management.Then there are more scholars exploring the theory of asset allocation from different perspectives.In this paper,I will introduce a popular method of portfolio construction—Risk Parity,and I will explore its theoretical basis firstly and then make empirical test in China.Different from previous studies those which put equal amounts of risk into assets,this paper applies factor risk parity which focus on factors derived by PCA instead of assets and I will propose to choose a solution from solution set to maximize the diversified ratio,which is meaningful in reality.Compared to minimum variance method,equal weight allocation method and asset risk parity method,factor risk parity performs well in diversification and risk-adjusted return.It turns out that factor risk parity is effective in China.