Sharpe Parity Redux

Abstract

In this article, the authors investigate the performance of the Sharpe parity asset allocation strategy relative to the more well-known 60/40, mean–variance, risk parity, and min-variance strategies. Each portfolio selection strategy was tested under a number of different constraints and asset class configurations. In addition to historical data, bootstrapped simulated time series were used to test the robustness of the analysis. The primary conclusion was that the performance of each of the strategies considered was highly dependent on the constraints applied during the portfolio construction process. As such, portfolio managers choosing to implement a given portfolio construction methodology must be careful in choosing their asset universe and calibrating their asset class level constraints to give their portfolios the maximum performance advantage versus rival portfolio selection methodologies and manager benchmarks.