Journal of Risk

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Diversifying risk parity

Harald Lohre, Heiko Opfer and Gábor Ország

ABSTRACT

Under this paradigm the maximum diversification portfolio is equivalent to a risk parity strategy with respect to the uncorrelated risk sources embedded in the underlying portfolio assets. We characterize the mechanics and properties of this diversified risk parity strategy. Moreover, we explore the risk and diversification characteristics of traditional risk-based asset allocation techniques such as 1=N , minimum-variance or risk parity and show the diversified risk parity strategy to be very meaningful when benchmarked against these alternatives.