Risk Parity and Trend-Following Approach on Asset Allocation
Aigbedion, Aisosa Kelly
Promotor(s) : Hübner, Georges
Date of defense : 23-Jun-2021/25-Jun-2021 • Permalink : http://hdl.handle.net/2268.2/11632
Details
Title : | Risk Parity and Trend-Following Approach on Asset Allocation |
Author : | Aigbedion, Aisosa Kelly |
Date of defense : | 23-Jun-2021/25-Jun-2021 |
Advisor(s) : | Hübner, Georges |
Committee's member(s) : | Lambert, Marie
Fagnant, Annick |
Language : | English |
Number of pages : | 60 |
Keywords : | [en] naive risk parity, risk parity, trend following, Sharpe ratio |
Discipline(s) : | Business & economic sciences > Finance |
Target public : | Student |
Institution(s) : | Université de Liège, Liège, Belgique |
Degree: | Master en sciences de gestion, à finalité spécialisée en Banking and Asset Management |
Faculty: | Master thesis of the HEC-Ecole de gestion de l'Université de Liège |
Abstract
[en] The purpose of this paper is to investigate and analyse the performance of the trend-following -risk parity portfolio approach and to examine whether or not it can be expected to outperform the 60/40 portfolio and equal-weighted approaches. Performance and risk were measured using Sharpe Ratio, Sortino Ratio, Maximum Drawdown and the sensitivity to different market conditions were analysed- the change in interest rates and equity market volatility on portfolio returns.
In the empirical study, it was found that the combination of trend-following -risk parity approach generates an acceptable expected return, when analysing the sample period from November 2000 to December 2020. The trend-following portfolios were found to significantly outperform the equal-weighted portfolio, the 60/40 portfolio and the naïve risk-parity for the investment universes but the trend-following risk parity provide a reasonable risk-adjusted return. The Sharpe ratio of the naïve risk parity & trend following was statistically significantly different from the Sharpe ratio of other passive strategies.
Results of that the naïve risk parity & trend-following showed a positive sensitivity to the change in interest rates neither when decreasing or increasing. The naïve risk parity & trend-following portfolio also reduced the volatility, maximum drawdown and negative volatility of the portfolio than other portfolios.
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