Bad Taste - November 27, 2024 - Managing Volatility with Naïve Risk Parity

The tastylive network

The discussion delves into risk parity portfolio allocation, emphasizing risk allocation over capital allocation to achieve balanced risk contributions across assets. Using an example with SPY, QQQ, Apple, TLT, and Gold, they explore a back-of-the-envelope calculation for naïve risk parity, highlighting its simplicity over complex optimization. While it does not consider expected returns, it offers a practical approach to managing portfolio volatility, aiming for a stable Sharpe ratio.