MAD risk parity portfolios

Abstract

In this paper, we investigate the features and the performance of the risk parity (RP) portfoliosusing the mean absolute deviation (MAD) as a risk measure. The RP model is a recent strategyfor asset allocation that aims at equally sharing the global portfolio risk among all the assetsof an investment universe. We discuss here some existing and new results about the propertiesof MAD that are useful for the RP approach. We propose several formulations for finding MAD-RP portfolios computationally, and compare them in terms of accuracy and efficiency. Furthermore, we provide extensive empirical analysis based on three real-world datasets, showing that the performances of the RP approaches generally tend to place both in termsof risk and profitability between those obtained from the minimum risk and the Equally Weighted strategies.