Risk parity as an asset allocation technique: evidence from South African capital markets

 

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dc.contributor.advisor Van Rensburg, Paul en_ZA
dc.contributor.author Greig, Nicholas en_ZA
dc.date.accessioned 2016-07-20T12:35:49Z
dc.date.available 2016-07-20T12:35:49Z
dc.date.issued 2016 en_ZA
dc.identifier.citation Greig, N. 2016. Risk parity as an asset allocation technique: evidence from South African capital markets. University of Cape Town. en_ZA
dc.identifier.uri http://hdl.handle.net/11427/20544
dc.description.abstract This paper investigates the asset allocation technique known as Risk Parity, whereby assets are allocated such that they contribute equal amounts of risk to the overall risk of the portfolio. It is a relatively new technique and one which has grown in popularity and stature amongst Hedge Fund and asset managers alike. Academics have recently also come to fore, documenting the flaws with the mean-variance framework and have begun looking towards portfolio construction techniques based solely on predicted risk, not expected return. The prior literature on the topic is exclusively done abroad and finds that an unlevered Risk Parity portfolio, despite being inferior to other portfolios from a return perspective, is superior in terms of its risk-adjusted return, or Sharpe Ratio. Many academics propose the idea of levering up the Risk Parity portfolio so that its standard deviation matches that of another, riskier portfolio. This paper analyses five portfolio strategies, namely an unlevered and levered Risk Parity, a traditional 60/40, a minimum variance and a maximum Sharpe Ratio (tangency) portfolio. The first part of the paper will categorise the equity asset class into the FINDI and RESI indices, as well as using the ALBI and South African Property Index (PROP). The second part of this paper, Test 2, will subcategorize the equity portion of the strategies into Value and Momentum, using style indices, thus testing for evidence of style anomalies on the JSE. It will still use the ALBI and PROP as the other asset classes. The key findings are that for both tests, the unlevered and levered Risk Parity strategies underperform the FTSE/ALSI benchmark over the sample period, concluding that at the given level of risk free rates, Risk Parity as an asset allocation technique is not superior. Furthermore, Test 2 provides superior annualized returns for all but one of the strategies, indicating the possibility of style anomalies on the JSE. en_ZA
dc.language.iso eng en_ZA
dc.subject.other Financial Management en_ZA
dc.title Risk parity as an asset allocation technique: evidence from South African capital markets en_ZA
dc.type Master Thesis
uct.type.publication Research en_ZA
uct.type.resource Thesis en_ZA
dc.publisher.institution University of Cape Town
dc.publisher.faculty Faculty of Commerce en_ZA
dc.publisher.department Department of Finance and Tax en_ZA
dc.type.qualificationlevel Masters
dc.type.qualificationname MCom en_ZA
uct.type.filetype Text
uct.type.filetype Image
dc.identifier.apacitation Greig, N. (2016). <i>Risk parity as an asset allocation technique: evidence from South African capital markets</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax. Retrieved from http://hdl.handle.net/11427/20544 en_ZA
dc.identifier.chicagocitation Greig, Nicholas. <i>"Risk parity as an asset allocation technique: evidence from South African capital markets."</i> Thesis., University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax, 2016. http://hdl.handle.net/11427/20544 en_ZA
dc.identifier.vancouvercitation Greig N. Risk parity as an asset allocation technique: evidence from South African capital markets. [Thesis]. University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax, 2016 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/20544 en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Greig, Nicholas AB - This paper investigates the asset allocation technique known as Risk Parity, whereby assets are allocated such that they contribute equal amounts of risk to the overall risk of the portfolio. It is a relatively new technique and one which has grown in popularity and stature amongst Hedge Fund and asset managers alike. Academics have recently also come to fore, documenting the flaws with the mean-variance framework and have begun looking towards portfolio construction techniques based solely on predicted risk, not expected return. The prior literature on the topic is exclusively done abroad and finds that an unlevered Risk Parity portfolio, despite being inferior to other portfolios from a return perspective, is superior in terms of its risk-adjusted return, or Sharpe Ratio. Many academics propose the idea of levering up the Risk Parity portfolio so that its standard deviation matches that of another, riskier portfolio. This paper analyses five portfolio strategies, namely an unlevered and levered Risk Parity, a traditional 60/40, a minimum variance and a maximum Sharpe Ratio (tangency) portfolio. The first part of the paper will categorise the equity asset class into the FINDI and RESI indices, as well as using the ALBI and South African Property Index (PROP). The second part of this paper, Test 2, will subcategorize the equity portion of the strategies into Value and Momentum, using style indices, thus testing for evidence of style anomalies on the JSE. It will still use the ALBI and PROP as the other asset classes. The key findings are that for both tests, the unlevered and levered Risk Parity strategies underperform the FTSE/ALSI benchmark over the sample period, concluding that at the given level of risk free rates, Risk Parity as an asset allocation technique is not superior. Furthermore, Test 2 provides superior annualized returns for all but one of the strategies, indicating the possibility of style anomalies on the JSE. DA - 2016 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2016 T1 - Risk parity as an asset allocation technique: evidence from South African capital markets TI - Risk parity as an asset allocation technique: evidence from South African capital markets UR - http://hdl.handle.net/11427/20544 ER - en_ZA


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