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Article

The Properties of Alpha Risk Parity Portfolios

by
Jérôme Gava
1,2,*,† and
Julien Turc
1,2,*,†
1
Department of Economics, Ecole Polytechnique, Institut Polytechnique de Paris, 91120 Palaiseau, France
2
BNP Paribas, 75009 Paris, France
*
Authors to whom correspondence should be addressed.
These authors contributed equally to this work.
Entropy 2022, 24(11), 1631; https://doi.org/10.3390/e24111631
Submission received: 26 September 2022 / Revised: 31 October 2022 / Accepted: 4 November 2022 / Published: 10 November 2022
(This article belongs to the Special Issue Entropy-Based Methods for Finance and Risk Management)

Abstract

Risk parity is an approach to investing that aims to balance risk evenly across assets within a given universe. The aim of this study is to unify the most commonly-used approaches to risk parity within a single framework. Links between these approaches have been identified in the published literature. A key point in risk parity is being able to identify and control the contribution of each asset to the risk of the portfolio. With alpha risk parity, risk contributions are given by a closed-form formula. There is a form of antisymmetry—or self-duality—in alpha risk portfolios that lie between risk budgeting and minimum-risk portfolios. Techniques from information geometry play a key role in establishing these properties.
Keywords: portfolio optimization; risk parity; risk budgeting; generalized entropy; statistical divergence; information theory; portfolio selection; investment risk; diversification portfolio optimization; risk parity; risk budgeting; generalized entropy; statistical divergence; information theory; portfolio selection; investment risk; diversification

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MDPI and ACS Style

Gava, J.; Turc, J. The Properties of Alpha Risk Parity Portfolios. Entropy 2022, 24, 1631. https://doi.org/10.3390/e24111631

AMA Style

Gava J, Turc J. The Properties of Alpha Risk Parity Portfolios. Entropy. 2022; 24(11):1631. https://doi.org/10.3390/e24111631

Chicago/Turabian Style

Gava, Jérôme, and Julien Turc. 2022. "The Properties of Alpha Risk Parity Portfolios" Entropy 24, no. 11: 1631. https://doi.org/10.3390/e24111631

APA Style

Gava, J., & Turc, J. (2022). The Properties of Alpha Risk Parity Portfolios. Entropy, 24(11), 1631. https://doi.org/10.3390/e24111631

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