Does the number of holdings in a risk parity portfolio matter?

Abstract

This empirical study is an endeavor to assess the impact of the number of securities in a risk parity portfolio on its performance. The study focuses on performance analysis of fifty, seventy-five and hundred stocks risk parity portfolio for emerging markets—India and China—and the developed market—the USA. Alpha of the risk parity portfolio has shown sensitivity to the change in the size as a number of holdings of the portfolio. The findings of this empirical study reveal that seventy-five stocks risk parity portfolio is in a sweet-spot for the full sample time period from Dec 2002 to Dec 2014. It not only generates statistically significant superior alpha, but also achieves a similar level of risk diversification as to fifty and hundred stocks portfolio. Testing of sub-periods of the full sample time period, which is coinciding with interest rate cycle, suggests that during the crucial period of financial crisis of 2008, seventy-five stocks portfolio shows the superior performance of alpha, Sharpe ratio and Treynor ratio over fifty stocks and hundred stocks portfolio with a similar level of risk diversification. However, the possibility of superior risk parity portfolio with a marginally higher or lower number than seventy-five stock portfolio cannot be denied.