Risk Parity Portfolio: An Alternative for the Spanish Stock Market

Abstract

Capitalization-weighted indexes are the most common way to gain access to broad equity market performance. However, interest in risk based investing has grown steadily in the recent post-crisis years as investors seek to overcome the limitations of traditional approaches to asset allocation. Despite the interest, there remains confusion about how to implement these strategies in any investor’s portfolio, and even more when we want to implement it into a particular asset class. This paper compares some risk-based indexation methodologies, where risk parity takes an important role, and illustrates these issues as it applies to the Ibex 35 universe. We also use the typical capitalization-weighted index as a benchmark. Using 10 years of data, we show that risk parity portfolios outperform all the underlying portfolios on an absolute and risk adjusted basis.