Effective Diversification Practices: Investing through Uncertain Economic Conditions

42 pagesThe first iteration of risk parity, dubbed “All Weather” was introduced by Ray Dalio and his associates at Bridgewater Associates. The goal of the strategy is to create a diversified portfolio with equal risk distribution among asset classes so that high performance can be achieved through any period of economic uncertainty. The combination of risk-based allocation and use of leverage to boost expected returns has led to strong performance over long periods of time. After impressive performances during the modern day market crashes (2001 dot com bubble and 2008 financial crisis), the strategy gained in popularity among institutional investors. In this thesis, I will discuss the history of risk parity and its theoretical background versus other strategies, empirically analyze backtested risk parity portfolios, and discuss its performance during the COVID-19 market crash