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Leverage Aversion and Risk Parity

Financial analysts journal, 2012-01, Vol.68 (1), p.47-59 [Peer Reviewed Journal]

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Title:
Leverage Aversion and Risk Parity
Author: Asness, Clifford S. ; Frazzini, Andrea ; Pedersen, Lasse H.
Subjects: Asset allocation ; Bond markets ; Bond portfolios ; Capital assets ; Corporate bonds ; Equity ; Financial assets ; Financial leverage ; Financial portfolios ; Financial risks ; Government bonds ; Investment analysis ; Investment returns ; Investment risk ; Investors ; Leverage ; Market portfolios ; Portfolio analysis ; PORTFOLIO MANAGEMENT ; Rates of return ; Risk aversion ; Risk management ; Risk premiums ; Securities markets ; Stock exchange ; Stock exchanges ; Studies ; Treasuries ; Treasury bonds ; Volatility
Is Part Of: Financial analysts journal, 2012-01, Vol.68 (1), p.47-59
Description: The authors show that leverage aversion changes the predictions of modern portfolio theory: Safer assets must offer higher risk-adjusted returns than riskier assets. Consuming the high risk-adjusted returns of safer assets requires leverage, creating an opportunity for investors with the ability to apply leverage. Risk parity portfolios exploit this opportunity by equalizing the risk allocation across asset classes, thus overweighting safer assets relative to their weight in the market portfolio.
Publisher: Charlottesville: CFA Institute
Language: English
Identifier: ISSN: 0015-198X
EISSN: 1938-3312
DOI: 10.2469/faj.v68.n1.1
CODEN: FIAJA4
Source: ProQuest Central

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