Abstract
Students have been well exposed to Markowitz’s (1952) Mean-Variance Optimization (Modern Portfolio Theory). Nevertheless, its subpar performance during the 2008 global financial crisis exposed it to significant criticism. As a result, a different strategy known as Risk Parity has attracted significant attention. Over the years, Risk Parity methods have gained popularity as investment solutions. As discussed in Fabozzi, Simonian, and Fabozzi (2021), estimates from Neuberger Berman, the total value of assets being managed using Risk Parity strategies is approximately $120 billion. However, with leverage, that number swells considerably, to $400 billion-$500 billion. The popularity of this methodology has spurred the creation of an index series of Risk Parity by S&P, which is used to benchmark equally weighted parity strategies (Liu, Brzenk and Cheng 2020). Due to the increase in popularity and utilization of Risk Parity, it is important for students to be introduced to this alternate optimization technique. This note exposes students to the concept of Risk Parity, discusses its potential strengths and weaknesses and demonstrates its use over the period 1990-2023, using annual data and comparing it to a 60/40 stock/bond portfolio.
Recommended Citation
(2026)
"Introducing the Risk Parity Portfolio Optimization Approach to Students: A Note,"
Journal of Economics and Finance Education: Vol. 24:
Iss.
1, Article 3.
Available at:
https://scholarship.rollins.edu/jefe/vol24/iss1/3
