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Abstract
This article examines the application of risk parity to fully diversify an equity portfolio. It presents wealth accumulation in a stochastic dominance framework, tested over increasing investment horizons. The portfolio construction algorithms consider sector, country, and stocks in achieving an alternative to capitalization-weighted approaches. Risk parity is dominant over 75% of the historical periods for any two-year horizon and is dominant in all cases after six-year horizons. It achieves dominance over capitalization-weighted indices over shorter horizons during periods of higher market volatility, periods of higher inflation, and periods with steep yield curves.
TOPICS: Equity portfolio management, commodities, analysis of individual factors/risk premia
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