A risk parity strategy could be applied to fixed-income-only portfolio, and potentially still achieve a higher risk-adjusted return than a benchmark.
We believe portfolio constraints, the asset universe selection, lookback period and rebalance frequency are key variables that determine the performance of a risk parity portfolio.
The maximum drawdown of our hypothetical risk parity portfolio was smaller during modest market downturns, but was greater during market crises, a trait that is related to the selected asset universe and lookback periods of the simulation.
Our simulation showed a leveraged risk parity portfolio could potentially achieve a higher total rate of return than a fixed income benchmark with the same quantity of risk. Leverage, however, can also magnify losses when used in a risk parity portfolio.