Portfolio Risk and Performance

Taking Control of Your Risk Allocation

Topics - Portfolio Risk and Performance

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Taking Control of Your Risk Allocation

Investments and Pensions Europe

By targeting diversification and consistent total portfolio risk at each point in time, investors who choose risk parity are able to more fully realize the potential benefits of that risk-balanced investment strategy. The authors add that investors who also apply sensibly proportioned and diversified tactical tilts to risk parity may generate additional uncorrelated returns with little loss of diversification.

Some of these active views may also provide modest risk management benefits, but they caution that no one should be under the illusion that tactical tilts are a suitable replacement for disciplined risk management.

Starting with a more diversified allocation, maintaining that diversification by managing risk through time, and then adding value through active management may help investors take the risks they want to take and avoid the ones they don’t — and may get better risk-adjusted returns than a traditional portfolio, the authors conclude.

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

 

Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. Hypothetical performance results are presented for illustrative purposes only.

 

Diversification does not eliminate the risk of experiencing investment loss.

 

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This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.