Stock Allocation Strategy with Equal risk Contribution

Document Type : Research Paper

Authors

1 Associate Professor, School of Management and Accounting, Shahid Beheshti University, Tehran, Iran

2 Department of Finance and Accounting, Faculty of management and Accounting, Tehran, Iran

3 Department of Finance and Accounting, Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran

Abstract

Optimal asset allocation affects portfolio performance and decreases investor risk. In this regard, the most widely used models include asset allocation with equal-weighted and minimum variance. These models from the very beginning have faced much criticism. Following the financial crisis in America in 2008 equal risk contribution of asset allocation model was presented where special attention is the risk factor. In equal risk contribution (ERC), the risk contribution of each portfolio is equal. In this paper, the performance of these three strategies in terms of risk, return, Sharp ratio, diversification in terms of weight and risk, maximum drawdown, turnover, cost of transactions, risk in financial crises and cumulative returns are compared with each other. Samples included weekly data of 25 main indexes in Tehran Stock Exchange from 2006 to 2014. The results of this study show that equal risk contribution of asset allocation strategy in most cases performs moderately well and in some cases performs better than the other two strategies. Likewise, the investors and portfolio managers have more reliable performance by applying it.

Keywords

References

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History

  • Receive Date: 10 January 2019
  • Revise Date: 27 February 2020
  • Accept Date: 29 February 2020

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