Hands-On Machine Learning for Algorithmic Trading

Risk parity

The fact that the previous 15 years have been characterized by two major crises in the global equity markets, a consistently upwardly-sloping yield curve, and a general decline in interest rates made risk parity look like a particularly compelling option. Many institutions carved out strategic allocations to risk parity to further diversify their portfolios.

A simple implementation of risk parity allocates assets according to the inverse of their variances, ignoring correlations and, in particular, return forecasts:

var = monthly_returns.var()risk_parity_weights = var / var.sum()

The risk parity portfolio is also shown in the efficient frontier diagram at the beginning of this section.