Risk Disparity

Abstract

Investors seek to grow their wealth over time and avoid large draw-downs along the way, but these goals conflict. A policy portfolio serves as an expression of how investors balance these conflicting goals. A policy portfolio that maintains constant asset weights, however, experiences significant inter-temporal disparity in its risk profile, thereby defeating the purpose for which it is intended. This article offers evidence of inter-temporal risk disparity and shows how investors can use measures of intrinsic portfolio fragility and extrinsic market fragility to stabilize a portfolio’s risk profile.

TOPICS: Portfolio theory, risk management, portfolio construction