Although portfolio management didn't change much during the 40 years
after the seminal works of Markowitz and Sharpe, the development of risk
budgeting techniques marked an important milestone in the deepening of
the relationship between risk and asset management. Risk parity then
became a popular financial model of investment after the global
financial crisis in 2008. Today, pension funds and institutional
investors are using this approach in the development of smart indexing
and the redefinition of long-term investment policies.
Written by a well-known expert of asset management and risk parity,
Introduction to Risk Parity and Budgeting provides an up-to-date
treatment of this alternative method to Markowitz optimization. It
builds financial exposure to equities and commodities, considers credit
risk in the management of bond portfolios, and designs long-term
investment policy.
The first part of the book gives a theoretical account of portfolio
optimization and risk parity. The author discusses modern portfolio
theory and offers a comprehensive guide to risk budgeting. Each chapter
in the second part presents an application of risk parity to a specific
asset class. The text covers risk-based equity indexation (also called
smart beta) and shows how to use risk budgeting techniques to manage
bond portfolios. It also explores alternative investments, such as
commodities and hedge funds, and applies risk parity techniques to
multi-asset classes.
The book's first appendix provides technical materials on optimization
problems, copula functions, and dynamic asset allocation. The second
appendix contains 30 tutorial exercises. Solutions to the exercises,
slides for instructors, and Gauss computer programs to reproduce the
book's examples, tables, and figures are available on the author's
website.
