Although portfolio management didn't change much during the 40 years after the seminal works of Markowitz and Sharpe,
the development of risk budgeting techniques marked an important milestone in the deepening of
the relationship between risk and asset management. Risk parity then became a
popular financial model of investment after the global financial crisis in 2008.
Today, pension funds and institutional investors are using this approach in the development of
smart indexing and the redefinition of long-term investment policies.
Introduction to Risk Parity and Budgeting provides an up-to-date treatment of this alternative method to Markowitz optimization.
It builds financial exposure to equities and commodities, considers credit risk in the management of
bond portfolios, and designs long-term investment policy.
The first part of the book gives a theoretical account of portfolio optimization and risk parity.
The author discusses modern portfolio theory and offers a comprehensive guide to risk budgeting.
Each chapter in the second part presents an application of risk parity to a specific asset class.
The text covers risk-based equity indexation (also called smart beta) and shows how to use risk
budgeting techniques to manage bond portfolios. It also explores alternative investments, such as
commodities and hedge funds, and applies risk parity techniques to multi-asset classes.
The book's first appendix provides technical materials on optimization problems, copula functions, and dynamic asset allocation.
The second appendix contains 30 tutorial exercises. Solutions to the exercises, slides for instructors, and Gauss computer programs
to reproduce the book's examples, tables, and figures are available on the book's website.
I have made available for academic course instructors a copy of most of the Figures (100) and Tables (121) in Introduction to Risk Parity and Budgeting (RPB).
For each of the 8 chapters including the appendices, I have created beamer files, with one slide per Figure or Table.
The captions and the corresponding page numbers are also included.
This library contains the Gauss programs to reproduce the different examples, tables and figures presented in Introduction to Risk Parity and Budgeting (RPB).
"Thierry Roncalli's book situates the risk parity approach, which has become very popular with investors and managers,
in a broader conceptual and technical context, which is that of risk budgeting. This publication is a must for
investors who wish to gain serious insight into risk allocation issues."
—Noël Amenc, Professor of Finance, EDHEC Business School; Director, EDHEC-Risk Institute; and CEO, ERI Scientific Beta
"A mathematical tour de force of the paradigm shift in portfolio orchestration where the risk section plays bold notes to temper
the return section, in a melodious harmony reflecting new trends in investment practice. A most current and comprehensive
quantitative exposition of the evolution of modern portfolio theory, from mean-variance to risk parity methods,
this book fills an important need for academics and practitioners who are looking for an up-to-date technical exposition
of the art and science of portfolio construction."
—Sanjiv Ranjan Das, William and Janice Terry Professor of Finance, Santa Clara University
"Professor Roncalli's masterful treatment on the subjects of risk parity investing and risk
budgeting represents a significant contribution to the rapidly emerging literature on risk parity.
This text provides an academically rigorous yet intuitive and understandable introduction to important
topics like risk-based equity and fixed-income portfolio construction as well as asset allocation.
The book surveys and pulls from seminar papers as well as frontier research in the risk parity field and provides
a balanced and application-oriented discussion on the important nuances. This book is highly recommended for
finance industry practitioners as well as students of financial engineering."
—Jason Hsu, UCLA Anderson School of Management
"Roncalli has written an excellent and
balanced exposition of the risk parity approach to investing. This is very valuable reading for quant
analysts and for technically oriented porfolio managers and asset allocators interested in this hot topic.
The book covers everything from basic mechanics to advanced techniques and from the broad context of risk
parity as one way to solve the general portfolio construction problem to detailed practical investment
examples within and across asset classes."
—Antti Ilmanen, Managing Director, AQR Capital Management
"Thierry Roncalli has pioneered risk parity as a practitioner. His exhaustive and rigorous book is now the
reference on the subject."
—Attilio Meucci, SYMMYS
"The traditional Markowitz portfolio allocation can be improved by using techniques where a specific
amount of risk is allocated to an asset class yielding so-called risk-parity portfolios. Although it
can be puzzling how this is done, this book takes the lead by providing not only the theory but also by showing
in many examples how it can actually be done. It should be on the desk of anyone interested in modern portfolio allocation.
The text should appeal not only to senior practitioners and academics but also to students since many
no-nonsense problems are proposed whose solutions may be found on the author’s website."
—Michael Rockinger, Professor, HEC Lausanne and Swiss Finance Institute
"Thierry Roncalli's book provides a rigorous but highly accessible treatment of all theoretical
and practical aspects of risk parity investing. The author has been for many years on the forefront of
research on building better diversified portfolios. His book will quickly prove indispensable for all serious investors."
—Bernhard Scherer, Chief Investment Officer, FTC Capital GmbH
"This exciting new book provides detailed and rigorous coverage of portfolio risk management
beyond the Markowitz approach. Professor Thierry Roncalli studies the importance of risk parity and
budgeting in portfolio design and offers a masterly account of this underdeveloped area of practical research.
Definitely, the book is a must-read for graduate students in finance and for any investment professional."
—Professor Dr. Diethelm Würtz, Swiss Federal Institute of Technology, Zurich
