Risk parity and other risk based portfolio allocation approaches in South African and international equity markets
Master Thesis
2014
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University of Cape Town
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Abstract
Risk parity, a portfolio allocation technique based on the equalization of constituent risk contributions, has garnered significant attention in academic circles over the past decade. This study employs back-tests to explore the empirical performance of the approach relative to other prominent heuristic and risk based allocation techniques on South Africa's All Share Index (ALSI) and 12 auxiliary international equity indices. We find that the technique discharges its core risk contribution equalization objectives well in out of sample testing but appears to lag other risk based allocation techniques in terms of risk and return performance. We also establish links between the approaches' performance and leverage aversion theory and find some evidence that levels of market concentration may impact the performance of risk parity portfolios across equity indices.
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Includes bibliographical references.
Reference:
Panulo, B. 2014. Risk parity and other risk based portfolio allocation approaches in South African and international equity markets. University of Cape Town.