Abstract
It is often argued in defense of Risk Parity portfolios that they maximize the Sharpe ratio if their securities have identical Sharpe ratios and identical correlations. However, securities have neither identical Sharpe ratios nor this correlation structure. In realistic markets, Risk Parity portfolios do not maximize the Sharpe ratio, do not minimize variance, do not maximize the Information ratio, and do not have any other commonly sought optimal property. So, what’s the big deal about Risk Parity?
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