Risk Parity for Dummies

Risk Parity for Dummies

Risk parity asset allocation systems seem to be all the rage these days.

If you are unfamiliar with the strategy, Mebane Faber has some great videos outlining how risk parity works.

Here is a source paper with the details on all the returns and information on a risk parity strategy:

Leverage Aversion and Risk Parity” by Asness, Frazinni, and Pederson (2012).

We have a nice research summary and a spreadsheet entitled “Risk Parity for Dummies”, which outlines the mechanics of risk parity and levered risk parity.

Here is quick outline of the most basic risk parity strategy (click to expand):

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Here is the excel spreadsheet that shows you how to actually create a risk parity portfolio (click to expand):

Risk Parity for Dummies

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Click to enlarge the figure


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About the Author:

Wesley Gray, PhD
Wes Gray has published multiple academic papers and four books, including Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016).After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm that delivers affordable active exposures for tax-sensitive investors. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes currently resides in the suburbs of Philadelphia with his wife and three children.

4 Comments

  1. Steven Schweitzer October 29, 2013 at 11:58 am

    Is there a way to get a copy of this spreadsheet?

  2. Derek Wong June 4, 2017 at 1:14 am

    Hello, I was unable to open the dropbox document. Is the link broken?

  3. Wesley Gray, PhD
    Wesley Gray, PhD June 4, 2017 at 4:01 pm

    Hey Derek,
    It should work. I just did a tweak on the link so it will direct download. See if that fixes it

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