BUSI 4502 Lecture Notes - Lecture 11: Tail Risk, Risk Parity, Risk Measure
30 Aug 2018
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Document Summary
It is relatively important for investors to choose portfolio"s asset mix, which is determining which individual stock or bonds to hold. Some are passive while others are active strategies. A problem with passive strategy is that they fail to include recent information like change in risks and correlations among asset classes, which posed risk. As for active strategies, they historically take parametric form which leading to difficulty in forecasting input parameters, like expected returns and correlation. The authors attempted to solve these problems by developing an asset allocation technology, known as tail risk parity, which reduces dead weight adjustment cost. It combines best elements of risk diversification offered by risk-weighted strategies with loss insurance protection offered by tail protection product. Hence, in this study, they will introduce concept of risk parity and describe tail risk parity and its ability to address the shortcomings of risk parity. Risk parity, a risk-weighted allocation technique, is introduced to address a static allocation"s limitations.
