Global Asset Allocation Based on Principal Component Risk Parity Model

Abstract

Contemporarily, as the economy enters the new normal, Chinese real estate prices that rose almost unilaterally in the past will be difficult to appear again. With just break, the high yield of wealth management products will no longer be the scene. Therefore, the importance of risk diversification among different assets, i.e., the allocation decision of major assets, becomes more and more prominent. This paper mainly investigates the application of principal component risk parity model in asset allocation. Specifically, the article focuses on the result of the experiment and the importance of this model. In the experiment, the principal component risk parity model is compared with the traditional risk parity model. At the same time, the principal component parity risk model is further analyzed and compared with other models from the related formulae derivation. Finally, the corresponding conclusions are drawn, and the advantages and necessity of rational usage of risk parity model in asset allocation are put forward. Overall, these results shed light on guiding further exploration of finding efficient models to help with asset allocation.