riskParityPortfolio: Compute risk parity portfolio

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Compute risk parity portfolio

Description

It calls FRAPO to compute portfolio weights with equal risk contribution, or equal covariance risk budget, then returns a S4 object of class fPORTFOLIO.

Usage

riskParityPortfolio(data, covmat="cov", strategy="minrisk",Type="MV")

Arguments

data	timeSeries object of returns data
covmat	Function to compute mltvariate covariance matrix, we support five methods:"cov","ledoitWolf","shrink","shrinkCC","slpm". The default is sample covariance "cov".
strategy	strategyPortfolio as in package fPortfolio, we support 5 cases in fPortfolio package: "GMVP","maxreturn","minrisk", "tangency" and "All Assets". The default is "minrisk".
Type	portfolio type as in package fPortfolio, the default is "MV".

Details

The risk parity portfolio has two options: the first is to select a subset of assets and compute risk parity weights. To this end, we implement one of four portfolio strategies: "GMVP","maxreturn","minrisk", "tangency". The idea is that each portfolio strategy will pick the desirable assets by assigning weights, the assets with non-zero weights are selected ones; afterwards, we compute risk parity weights of these assets. Secondly, for "All Assets", all assets are included and compute an optimal weight vector satisfying risk parity condition,namely, equal risk contribution or covariance risk budget.

GMVP or Global minimum risk Portfolio: The function minvariancePortfolio returns the portfolio with the minimal risk on the efficient frontier. To find the minimal risk point the target risk returned by the function efficientPortfolio is minimized.

tangency or maximal returns/risk ratio Portfolio: The function tangencyPortfolio returns the portfolio with the highest return/risk ratio on the efficient frontier. For the Markowitz portfolio this is the same as the Sharpe ratio. To find this point on the frontier the return/risk ratio calculated from the target return and target risk returned by the function .

minrisk or Minumum Risk: The function minriskPortfolio is an efficient portfolio which lies on the efficient frontier. The efficientPortfolio function returns the properties of the efficient portfolio as an S4 object of class fPORTFOLIO

maxreturn or Maximum Return Portfolio: The function maxreturnPortfolio returns the portfolio with the maximal return for a fixed target risk.

Risk parity portfolio calls FRAPO, which requires symmetric covariance matrices, so far we support only five covariance methods.

Value

returns an S4 object of class "fPORTFOLIO".

Author(s)

Ho Tsung-wu <[e-mail]>, College of Management, National Taiwan Normal University.

References

Roncalli Thierry, Introduction to Risk parity and Budgeting, 2014, CRC inc..
See also packages fPORTFOLIO and FRAPO

Examples

data(assetReturns)
assetReturns=assetReturns[,11:15]
output=riskParityPortfolio(assetReturns, covmat="cov", strategy="minrisk")
show(output)
getWeights(output)
getCovRiskBudgets(output)

JFE documentation built on Aug. 28, 2023, 9:06 a.m.