Quantitative Portfolio Strategy: Pension & Insurance – Applying A Risk Parity Strategy to a Fixed-Income-Only Portfolio

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Quantitative Portfolio Strategy: Pension & Insurance – Applying A Risk Parity Strategy to a Fixed-Income-Only Portfolio

Jun Jiang and Alexander Villacampa
MAR 29, 2021

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  • 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.