Almost exact risk budgeting with return forecasts for portfolio allocation

DOI10.1016/J.ORL.2023.02.002MaRDI QIDQ6161908zbMATH OpenFDO

Authors Avinash Bhardwaj, Manjesh Kumar Hanawal, Purushottam Parthasarathy

Publication date 28 June 2023

Published in Operations Research Letters (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2210.00969

zbMATH Keywords

asset allocationportfolio optimizationportfolio allocationrisk budgetingrisk parity

Mathematics Subject Classification ID

Quadratic programming (90C20) Applications of mathematical programming (90C90) Portfolio theory (91G10)

Abstract: In this paper, we revisit the portfolio allocation problem with designated risk-budget [Qian, 2005]. We generalize the problem of arbitrary risk budgets with unequal correlations to one that includes return forecasts and transaction costs while keeping the no-shorting (long-only positions) constraint. We offer a convex second order cone formulation that scales well with the number of assets and explore solutions to the problem in different settings. In particular, the problem is solved on a few practical cases - on equity and bond asset allocation problems as well as formulating index constituents for the NASDAQ100 index, illustrating the benefits of this approach.

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Cites work

• scientific article; zbMATH DE number 2107836 (Why is no real title available?)
• Cardinality-constrained risk parity portfolios
• Computing a nearest symmetric positive semidefinite matrix
• Equal risk bounding is better than risk parity for portfolio selection
• Introduction to risk parity and budgeting
• Long-only equal risk contribution portfolios for CVaR under discrete distributions
• Risk parity portfolios with risk factors

Cited in

(1)

• Forecasting compositional risk allocations

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